Kuroda Brings Oxford Mindset After Chicago-Alum Shirakawa

It was an elite band of graduate students that in the early 1970s attended intense economics sessions in a small, austerely furnished basement under the 15th-century lodge at All Souls College at the University of Oxford.

The tutor was Nobel Laureate economist John Hicks and he both terrified and enchanted the attendees: At least 11 of the 16 members of the class of 1971 went on to become professional economists. Now one of them, Haruhiko Kuroda, is the incoming governor of the Bank of Japan.

“The impact of his days in Oxford was very large,” said Masahiro Kawai, dean of the Asian Development Bank Institute, the bank’s Tokyo-based research institute, who has known and worked with Kuroda for more than 15 years. “He often talks about his former professors.”

Oxford gave Kuroda, 68, a different mindset than that of his predecessor, Masaaki Shirakawa. Kuroda got the BOJ job on a pledge to pull Japan out of 15 years of deflation, while Shirakawa’s studies at the University of Chicago were steeped in Milton Friedman’s advocacy of low inflation and disciplined central banks in the context of well-run budget policy.

Stocks Cheer

Kuroda’s views reflect those of Prime Minister Shinzo Abe, whose push for aggressive monetary easing has helped lift stock prices to their highest level since September 2008 and pushed the yen to a 3 1/2-year low against the dollar. Former Bank of England board member Adam Posen sees Kuroda as an improvement on his forerunners, whose “passive-aggressive” policies contributed to prolonging deflation.

Previous governors “have engaged in rhetoric that undercuts the credibility of any commitments they made to higher inflation,” Posen, president of the Peterson Institute for International Economics Inc. in Washington, said in an interview. He is also the author of a book on Japan’s financial crisis and was an adviser to the government of former Prime Minister Junichiro Koizumi.

The bank’s new leadership may expand the range of its easing tools as part of a credible commitment to reflate, he said, adding that “the combination will make a material difference.”

Oxford Professors

Kuroda’s professors at Oxford, including Robin Matthews and Nobel Laureate James Mirrlees, were focused on getting students to think for themselves, according to economics students there at the time. It was “non-doctrinaire,” said John Llewellyn, a partner at Llewellyn Consulting in London, who earned his master’s degree a year before Kuroda.

Kuroda “was obviously a very smart student indeed and I am not at all surprised that he has reached this distinguished position,” said Richard Smethurst, his tutor then, via e-mail.

Oxford’s approach can be seen in the BOJ nominee’s insatiable appetite for the written word, which has carried him through such positions as currency chief at the Ministry of Finance, adviser to Koizumi, professor at Tokyo’s Hitotsubashi University and the job he’s leaving: president of the Asian Development Bank.

“Kuroda is a big reader of economics, mathematics and philosophy,” Akira Ariyoshi, a Hitotsubashi professor who worked under Kuroda at the finance ministry, said in an interview. “Even when he was trashing a paper, you could see that he was enjoying reading it.”

Great Depression

The future governor is a devotee of the late U.S. economist Irving Fisher, whose views on the dangers of deflation helped shape Kuroda’s conviction in the reflationary power of money-printing.

“During the Great Depression, Fisher argued that the most serious problem of deflation is to make real debt mushroom and damage the whole economy,” Kuroda said in an interview last month before his BOJ nomination. “So I have long advocated aggressive monetary easing to eradicate deflation in Japan.”

The development bank declined to make Kuroda available for an interview after he was named to the central bank. Kuroda’s nomination was today approved by the upper house of Parliament, a day after winning backing from the lower house, clearing his path to take the BOJ’s helm next week.

Despite recent signs of an economic pickup, Kuroda will have his work cut out for him when he takes the black leather chair in the governor’s office at the 131-year-old institution in Tokyo’s Nihonbashi business district.

Entrenched Challenges

Core consumer prices haven haven’t risen since the late 1990s, wages are stagnant, the nation posted a record trade deficit last year, and sovereign debt has ballooned to more than double gross domestic product. All this in a country where more than a quarter of the population will be over 65 by the end of next year.

Shirakawa often mentioned the nation’s graying during his five-year tenure, blaming “low growth” over the past decade in part on demographic changes in a speech in London last year. He also repeatedly said monetary policy alone can’t beat deflation and other branches of government must do their part.

The departing governor had to deal with the world’s worst postwar financial crisis within six months of taking the helm in April 2008. He helped safeguard Japan’s banking system from shocks, injected liquidity and expanded asset purchases. Yet this easing lagged behind that of other central banks -- the BOJ’s balance sheet expanded by about 50 percent during his term, while that of the Federal Reserve went up by 250 percent and the European Central Bank’s doubled.

Kuroda’s Deputies

In picking Kuroda and his deputies, Hiroshi Nakaso and Kikuo Iwata, Abe sought the advice of reflationary economists including Koichi Hamada, Etsuro Honda and Yoichi Takahashi. The bank, urged by Abe, set a 2 percent inflation target in January -- a month after he took the reins of government for the second time in six years.

Kuroda will take over after Shirakawa steps down March 19. Nakaso and Iwata, also confirmed today by the Diet, take the spots vacated the same day by the two current deputies.

“Kuroda has an out-and-out belief that prices are set by monetary policy,” Makoto Utsumi, who was the nation’s top currency official from 1989 to 1991, eight years before Kuroda took that job at the finance ministry, said in an interview last month. “No one else is as suited to be Abe’s choice.”

Kuroda’s reflationary views hardened in the 1990s, said Kawai of the development bank’s research institute.

‘Inadequate’ BOJ

During that period, “he felt monetary policy support was inadequate,” Kawai, who worked for Kuroda at the finance ministry and the development bank, said in an interview last month. Kawai said his former boss, a fluent English speaker, would regularly read blogs by influential academic thinkers including anti-austerity economist Paul Krugman.

In 2002, while they were both at the finance ministry, Kuroda and Kawai wrote an essay in the Financial Times entitled “Time for a Switch to Global Reflation.” They called for Japan to adopt a 3 percent inflation target and “innovative, non-traditional anti-deflationary policies.”

The authors translated the article into Japanese and made it available for distribution because many lawmakers had heard of it and were praising them for publicly advocating reflationary policy, according to Kawai.

While he was director general of the finance ministry’s international bureau, Kuroda was the architect of a Japanese proposal to establish an Asian monetary fund to help mitigate the regional economic crisis in 1997, according to Lee Jong Wha, a former chief development-bank economist under Kuroda who also advised former South Korean President Lee Myung Bak.

Currency Initiative

While the proposal didn’t succeed, it helped spawn the Chiang Mai Initiative, a currency-swap arrangement among Southeast Asian nations, China, South Korea and Japan. Takatoshi Ito, a Tokyo University professor and deputy of Kuroda when he was vice finance minister, said the initiative was his former superior’s “baby.”

Since moving to the development bank in 2005, Kuroda has raised the institution’s international profile and visibility, and tapped his global network of contacts to make contributions that have helped triple the bank’s capital base, Kawai said.

“Conventional central bankers probably have found it very difficult to navigate in a time of financial crisis, and his developmental background may be an added strength,” said Bangladesh Central Bank Governor Atiur Rahman, who has represented his country at the development bank. “Japan, which is having a lot of problems with growth, can really benefit if Mr. Kuroda comes in with a developmental agenda.”

Handling Staff

Kuroda may have been a little awkward in his dealings with bank staff and officials on the ground.

“He was never very comfortable with people-to-people development challenges, he was more comfortable on the macro side,” said Curtis Chin, U.S. ambassador to the development bank from 2007 to 2010 and now a Bangkok-based senior fellow at the Asian Institute of Technology. “You saw him less engaged visiting projects than you would at a big conference speaking economics.”

At those international meetings, Kuroda would often rub shoulders with financial heavyweights. He said in parliament last week that he is well acquainted with U.S. Federal Reserve Chairman Ben S. Bernanke, European Central Bank President Mario Draghi and departing Bank of England Governor Mervyn King.

“He is an activist, he is a communicator,” said Jeffrey Shafer, who was an undersecretary of international affairs for the U.S. Treasury in the mid-1990s and worked with Kuroda. He is now vice chairman and managing director of Citigroup Global Markets Inc. in New York. “A very important part of this is being able to communicate something that people believe in. It’s more than half about expectations,” he said.

No Athlete

Athletics aren’t Kuroda’s forte.

He struggled as a young bureaucrat on a climb with officials and journalists up a 1,500-meter (4,900-foot) mountain in Nagano Prefecture, to the west of Tokyo, according to Utsumi, now president of Japan Credit Rating Agency Ltd. Kuroda “got exhausted and said he’d never do it again,” he said. “He’s not the sporty type.”

The native of Japan’s southern island of Kyushu joined the ministry of finance in 1967 after graduating from Tokyo University’s faculty of law, a pipeline of mandarins and politicians. He rose up the bureaucratic ranks to reach vice minister for international affairs, a position he held from 1999 to 2003. He oversaw bouts of foreign-exchange intervention, selling yen as the currency rose.

Invoking Socrates

His knowledge of currency markets and classics can be seen in a paper he wrote in 1989, entitled “Socrates: The Dollar Dialogue.” In the essay, the Athenian sage holds a discussion with a modern-day economist about efforts by international policy makers to manage exchange rates.

Kuroda followed Eisuke Sakakibara, who was known as “Mr. Yen” for his comments that moved foreign-exchange markets, up the finance ministry ladder for six years. He will be the first ex-vice finance minister for international affairs to become central bank governor since the currency-chief post was set up in 1949, according to the BOJ.

During the Asian financial crisis, the pair would spend about a third of their time visiting countries such as Thailand, Indonesia and South Korea -- trips on which they would make decisions on loans to countries in financial distress, according to Sakakibara, who is now an Aoyama Gakuin University professor.

Wine-less Flights

“On these flights, I would drink wine and nap, while Kuroda was constantly reading,” he said in an interview at his Tokyo office this month. “He’d rather be home reading than drinking and talking, which he saw as a waste of time.”

Tokyo University’s Ito debunked a widely reported claim about Kuroda.

“I asked Mr. Kuroda whether it is true that he read all the books in the senior high library, and he said, ‘No, but a substantial part of the science section,’” Ito, who attended the same school and was also mentioned as a governor candidate, wrote in an e-mail this month.

Jesper Koll, head of Japanese equity research at JPMorgan Chase & Co. in Tokyo, who’s known Kuroda for more than 20 years, said the two had done “tons” of presentations together, including speaking on a panel to a Japanese telecommunications company.

It was at a 1995 event in London, probably at research institute Chatham House, after the collapse of the Japanese asset bubble, that Kuroda showed his sense of humor, Koll said. Kuroda was asked, during an intense moment in the debate, what a financial crisis was.

“He said when he was in Oxford one weekend, he was driving around in his little car through the beautiful countryside, and he switched the radio on,” Koll said. “They made an announcement that a particular insurance company had just gone bankrupt. He said he realized it was his insurance company, and he stopped, during the debate, and said ‘That’s a financial crisis.’”

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