Kuroda Mistake Shown Up by Draghi, Ex-Soros Adviser Says

Takeshi Fujimaki, a former adviser to billionaire investor George Soros, says Bank of Japan Governor Haruhiko Kuroda might learn a lesson from his European counterpart’s “bold” introduction of negative interest rates.

“If we must depend on monetary policy, quantitative easing is a colossal mistake,” Fujimaki, who holds a seat in Japan’s upper house of parliament, said in an interview in Tokyo on July 30. “The BOJ should have introduced a negative interest rate 20 years ago.”

The European Central Bank in June started charging 0.1 percent for holding cash in excess of minimum reserves, making President Mario Draghi and his fellow policy makers the first of the world’s major central banks to do so. Kuroda has relied on about 7 trillion yen ($68 billion) in monthly government bond buying to achieve the BOJ’s 2 percent inflation target.

“Quantitative easing means the monetary base will keep expanding, whereas under negative interest rates it would shrink because depositors at the BOJ’s current account would be penalized,” Fujimaki said. “These two approaches are completely opposite.”

Cash Increase

Kuroda pledged on April 4, 2013, to expand the amount of cash in circulation plus bank reserves to 270 trillion yen by the end of 2014. The monetary base, which swelled to 243 trillion yen as of June 30, will increase to 340 trillion yen next year, according to the median forecast of economists surveyed by Bloomberg News.

The BOJ estimates its current-account balance, financial companies’ deposits at the central bank, rose to a record 154.3 trillion yen last month. That’s a luxury Draghi could not afford because the treaties that founded the modern European Union prohibit the ECB from financing governments.

Negative rates would function as a penalty on the BOJ’s current-account balance, giving greater impetus for Japanese banks to invest overseas and increase lending instead of parking cash at the central bank, Fujimaki said.

“It’s a government-run pyramid scheme,” he said, referring to the BOJ’s expansion of the monetary base through purchases of Japanese government bonds. “At some point it will crash and so will the yen.”

Default Swaps

The cost to protect Japan’s bonds against non-payment hasn’t reflected these concerns. Five-year credit default-swaps dropped to 34.5 basis points on July 8, matching a 5 1/2-year low, according to data provider CMA. That’s less than half of what they were in December 2012, when Prime Minister Shinzo Abe came to power pledging to end deflation.

Japan’s benchmark 10-year yield closed today at 0.525 percent, the lowest among global markets after Switzerland. It will climb to 0.72 percent by year-end and reach 0.9 percent in 2015, according to the median estimates of strategists and economists surveyed by Bloomberg News.

The yen has strengthened 2.6 percent this year against the dollar, after slumping 18 percent in 2013. Japan’s currency will weaken to 110 per dollar and 141 per euro next year, according to analysts surveyed by Bloomberg News. It traded at 102.61 per dollar and 137.73 per euro as of 10:35 a.m. in London.

“The appropriate level for the yen would be about 180-200 per dollar,” Fujimaki said. “We continue to be stuck in deflation because it’s much stronger around 102. The Japanese economy won’t improve without a weaker yen.”

Drachmas, Marks

Fujimaki recommends owning assets denominated mostly in U.S. dollars, while also diversifying into Swiss francs, British pounds, or the currencies of Canada, Australia and New Zealand. He says he would avoid the euro.

“We don’t know when this shared currency may get split up,” said Fujimaki. “If I can get them back in German marks, I’d be happy to own a large amount of euros, but if it’s mostly in Greek drachmas, that would be a disaster.”

Fujimaki joined the Tokyo office of Morgan Guarantee Trust Co., which merged into JPMorgan Chase & Co., in 1985 and later served as managing director and treasurer. After correctly picking the 1990s rally in Japanese government bonds he was hired by Soros Fund Management, once the world’s biggest hedge fund group, in 2000. He stayed less than a year, saying to Bloomberg News at the time that he failed to read the Japanese bond market correctly. He has been predicting an eventual default in Japan since at least 2009.

(An earlier version of this story was corrected to add missing word “major” in third paragraph.)

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