Currency Veteran Kuroda Offers BOJ Credibility on ReflationJohn Brinsley
The Bank of Japan may pack a bigger punch under Haruhiko Kuroda, an opponent of deflation who ran the nation’s currency policy and then built an international reputation leading the Asian Development Bank.
Japanese Finance Minister Taro Aso told reporters yesterday Kuroda, 68, would be a “correct” choice as next BOJ chief, noting an international finance background. Two people familiar with the discussions earlier said Kuroda is Prime Minister Shinzo Abe’s pick for the post. Kuroda was in charge of foreign-exchange issues at the Ministry of Finance from 1999 to 2003.
While outgoing Governor Masaaki Shirakawa established a 76 trillion yen ($808 billion) asset-purchase fund and an unlimited bank-loan financing program, he failed to encourage inflation expectations, instead warning repeatedly about the dangers of excess stimulus. By contrast, Kuroda called for an inflation target a decade before the bank adopted one in January, and for years has spoken in favor of quantitative easing.
“He’s the right person to enhance the role of communication strategy at the Bank of Japan,” said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. in Tokyo and a former head foreign-exchange dealer at the BOJ. “He has already said in press interviews that the 2 percent inflation target should be achieved in two years -- this is a very important message to the market.”
Investors welcomed the nomination reports, with the yen yesterday reaching its lowest against the dollar since May 2010 on prospects for more stimulus. It later rallied amid haven demand stemming from concern Italy’s election failed to produce a majority winner. It was at 92.39 as of 12:08 p.m. in Tokyo.
Japan’s benchmark Nikkei 225 Stock Average closed at the highest in almost 4 1/2 years yesterday, when five-year bond yields fell to a record 0.12 percent, amid forecasts the BOJ will start purchasing longer-dated securities. The Nikkei today lost 1.4 percent at the midday break in Tokyo.
Heading the BOJ would cap a 45-year-career that includes a secondment to Washington with the International Monetary Fund, a stint as adviser to former Prime Minister Junichiro Koizumi and a master’s degree from Oxford University.
Born on the southern island of Kyushu in 1944, Kuroda entered the Ministry of Finance in 1967 after graduating from the University of Tokyo with a degree in law. As a young bureaucrat, he was sent to Oxford, where he studied economics under Nobel Prize winner John Hicks.
Kuroda said in a 2006 interview with the IMF that at Oxford he was taught “although economic theory may provide some insight, some framework, good policies may require something that goes beyond just economy theory or analysis -- some practical judgment, some good sense.”
His dream was to be a teacher, according to the IMF profile, an objective he fulfilled for a time as a professor at Tokyo’s Hitotsubashi University after he left the Finance Ministry in 2003. While at the ministry, he wrote a paper titled “Socrates: The Dollar Dialogue,” in which the ancient Greek philosopher muses on the efforts by international policy makers to manage foreign exchange rates.
Kuroda rose to become vice finance minister for international affairs, the senior official in charge of foreign-exchange issues, from 1999 to 2003. He succeeded Eisuke Sakakibara, who was known as “Mr. Yen” for his ability to influence the currency markets with his comments.
It was in the capacity as currency-policy chief that Kuroda honed his sense that monetary policy ought to be deployed more forcefully against what at the time were the first years of Japan’s deflation. Consumer-price declines set in in the late 1990s as banks constricted lending, seeking to fix balance sheets mauled by the destruction of burst bubbles in the stock and real-estate markets.
He wrote a 2002 opinion piece, along with colleague Masahiro Kawai, urging the BOJ to adopt a 3 percent inflation goal and to continually increase the monetary base through asset purchases. Kuroda also oversaw bouts of foreign-exchange intervention, selling yen as the currency appreciated.
“Kuroda has certainly been out there for a decade saying more could be done by the Bank of Japan, so he’s got credibility,” said Richard Jerram, chief economist at Bank of Singapore Ltd. “The requirements of what they need to do has been made clear. The outcome is going to be large-scale purchases of Japanese government bonds.”
Kuroda explained in an interview this month that falling prices exacerbate real debt burdens, and give the incentive to companies and households to postpone spending. Consumer prices excluding fresh food fell 0.2 percent in December. The price gauge hasn’t advanced 2 percent for any year since 1997, when a national sales tax was increased.
Leading the ADB since 2005, Kuroda has had a seat at international economic gatherings and observed from abroad how the BOJ for years resisted establishing an inflation target. Shirakawa and his colleagues on the current board took the step of setting a 2 percent goal last month, acting weeks after the election of Abe on a platform of reflation.
Shirakawa, 63, sought to damp impulses to press the central bank into extraordinary easing in the aftermath of the March 11, 2011 earthquake and tsunami, warning that any move to underwrite government debt would lead to sharp inflation and damage to people’s livelihoods.
Kuroda would need to be confirmed by both houses of parliament should Abe nominate him. The Democratic Party of Japan, the largest party in the upper house -- where the ruling Liberal Democratic Party lacks a majority -- is ready to approve Abe’s selections, the Nikkei newspaper reported.
The government will present Abe’s nominees to executives of the lower and upper house parliamentary affairs committee as soon as Feb. 28., according to a ruling coalition official who asked not be named as the discussions are private.
Abe is likely to tap Kikuo Iwata, an academic who has urged a ramping up in Japan’s monetary base to end deflation, and senior BOJ official Hiroshi Nakaso, as deputy governors, according to one government official and a ruling coalition executive, who asked not to be named as the talks are private.
The ADB chief, who enjoys swimming and reading detective novels in his spare time, has overseen a tripling in the Manila-based development lender’s capital base, to $165 billion, and enlarged its lending window for the cheapest loans to members.
Should he win the BOJ post, he will be tasked with implementing Abe’s vision for aggressive monetary easing and communicating it to global leaders concerned about the impact on a falling yen.
In a Feb. 11 interview, Kuroda advocated additional stimulus this year, saying the central bank has “really substantial room for monetary easing.” He also said that the global standard for achieving inflation targets was a two-year time horizon. When the BOJ set a 2 percent inflation target without a deadline in January, it said it would start open-ended asset purchases starting in 2014.
Japan’s government bond yield curve is pricing in Kuroda’s success in adopting more aggressive easing while failing to reach 2 percent inflation. The extra yield investors demand to hold 30-year JGBs instead of 5-year notes slid to 1.78 percentage points from the seven-year high of 1.86 earlier this month, reflecting speculation of increased BOJ debt purchases and that the buying will do little to spur consumer prices.
The yen has weakened more than 11 percent since the LDP regained power in December, vowing to push the BOJ to boost stimulus. Group of 20 finance ministers this month signaled support for Japan’s policies as long as Abe’s policy makers end any public endorsement of a declining currency.
Abe has retained the threat of changing the law governing the BOJ should the central bank fail to meet inflation targets, raising the risk of diminishing the institution’s independence. Even so, by burnishing the bank’s reputation, that may be less of a danger under Kuroda.
“The issue isn’t independence, the issue is accountability,” said Robert Feldman, head of Japan economic research at Morgan Stanley MUFG Securities Co. “Kuroda has to go back to the international community to win back its trust, and I think he will. I can’t think of a better candidate to head the BOJ.”
Kuroda must now implement what he has advocated in bringing Japan out of its deflationary spiral.
“He is an excellent choice,” said retired Yale University professor Koichi Hamada, an adviser who breakfasted with Abe last week at Blair House, across the street from the White House in Washington. “He understands Abenomics well,” Hamada told reporters yesterday in Tokyo when asked about Kuroda.
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