It's Mission Half Accomplished as Kuroda Eyes Last Year at BOJ

  • Inflation isn’t near the Bank of Japan’s 2 percent target
  • Governor Haruhiko Kuroda’s term ends on April 8, 2018

As Bank of Japan Governor Haruhiko Kuroda enters what may be his final year in office, it’s looking unlikely he’ll achieve what he set out to -- end deflation once and for all.

Continuing the bank’s history of radical policy measures, there were initial signs that prices were responding to the shock-and-awe of Abenomics in Kuroda’s early days in the job. But that was undercut by a collapse in oil prices and a fall in consumption after a tax hike pushed the nation into recession.

While prices look to be rising again, Kuroda’s 2 percent inflation target looks a bridge too far in his final year: economists forecast prices will rise 0.6 percent this year and 0.9 percent in 2018. Unless he agrees to stay on for another five-year term, success or failure of the current policy will come in the term of his successor.

"Kuroda’s massive easing helped weaken the yen, boost stock prices and alleviate concerns of a return to a deep deflation," said Masamichi Adachi, a senior economist at JPMorgan Chase & Co. and a former BOJ official. But, "in terms of the price target, it’s an absolute failure given he initially aimed to achieve it in two years." 

Adachi said he wants to wait and see what Kuroda does for the rest of his term before giving an overall assessment of his tenure.

Kuroda started in 2013 with a bang, doubling the size of the BOJ’s quantitative easing program in a bid to boost growth and push inflation to 2 percent in two years. By buying bonds and other assets, he aimed to drive down borrowing costs and boost inflation expectations.

While inflation has proved tough to budge, lending has been more responsive and is now rising at the quickest pace in years.

The expansion of the money supply has also helped weaken Japan’s currency, restoring some competitiveness to exporters.

That boosted stock prices and helped corporate profits hit a record. 

As for economic growth, there’s been success on that front too: Gross domestic product expanded by more than 1 percent in each of the quarters of 2016. That’s the first year since 2005 without a contraction and caps a 10 percent expansion since Prime Minister Shinzo Abe returned to power at the end of 2012.

But the unprecedented stimulus came with a cost that will hang over whoever takes the reins next April: a balance sheet that’s getting close to equaling a full year’s GDP. When the day finally does come to start winding back the bank’s easing polices, all those assets will weigh heavily on the BOJ as losses mount.

BNP Paribas SA estimates the BOJ will own 60 percent of the entire government debt market by the end of next year, up from 40 percent now.

Sooner is better for the BOJ to unwind its stimulus, according to Ryutaro Kono, chief Japan economist at the BNP. He says the bank needs to avoid the risks from further enlarging its balance sheet as that could cost trillions of yen when it exits the current policy.

The bank itself says that its policies could cause it problems. If bond yields at the end of September 2016 had risen by 1 percentage point, the BOJ would have had almost 24 trillion yen ($216 billion) in unrealized bond losses, Masayoshi Amamiya, executive director in charge of monetary policy and markets, said this week.

But for now, the balance sheet bubble is tomorrow’s problem. The 72-year-old Kuroda will preside over eight more policy meetings if he retires as scheduled -- although some BOJ analysts are talking about him being reappointed -- and most economists see no tightening.

Etsuro Honda, who advises Abe on economic policy, said earlier this year that the next governor must be someone who can seamlessly continue the current reflationary program and carry on what Kuroda has done. And that means the quest to vanquish deflation is likely to extend into 2018 and beyond.

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