Bank of Japan Is in Kuroda Mode Even If He Leaves

The current governor's stimulus policy is pegged to bond yields, a clever way to scale up or down without fuss.

Institutional momentum is all the rage.

Photographer: Olivier Douliery/Bloomberg

Someone has to run the Bank of Japan. A robot can't do it (yet).

Haruhiko Kuroda should be reappointed to continue as governor after his current term expires in April, and comfortingly, as of last week, he easily leads the field of contenders. Prime Minister Shinzo Abe's big election win must also be in Kuroda's favor. All to the good.

However, even if he is replaced, his reign will continue.

That's because Kuroda, to his credit, is presiding over a steady economic expansion and has put in place policies that ought to outlast his tenure. (Sound familiar to any Fed watchers?)

Inflation is much too low. That's not Kuroda's fault; it's the same in most major economies. In fact it’s worth celebrating that Japan’s no longer seeing deflation. And as my Bloomberg View colleague Noah Smith noted last week, the notion that Abenomics has failed is wide of the mark. Japan is going through a pretty sunny patch right now. A stronger global growth scene surely contributes.

To the extent that Abe owed his victory to a buoyant economy, Kuroda ought to be a beneficiary as well. The politician in Abe must be tempted to ask: If it ain't broke, why fix it?

He doesn't have to. Even if Abe follows precedent and makes a change at the BOJ after one term, Kuroda's legacy will live on. That's because last year, after a number of 5-4 splits on the BOJ board in favor of further stimulus, Kuroda ordered a rethink of policy. There was a sense they couldn't just keep throwing more and more money at inflation, hoping that it would magically get to the 2 percent target. Stimulus would help, but a longer-term strategy that would sow less division was required.

And so “yield curve control” was born as the dominant policy idea. Since its introduction in September last year, it's been remarkably uncontentious. The idea is that instead of policy being based on an amount of money pumped into the economy, the focus would shift to maintaining the yield on the 10-year bond at a certain level. For now, around zero. The BOJ will decide then how many bonds it needs to buy in order to keep the 10-year interest rate at zero. The amount will vary depending on what is going on in the bond market. So quantitative easing has almost become automated.

If bonds are rallying, the BOJ may need to buy less to keep the rate at zero, because downward pressure on yields has already done some of officials’ work for them. This allows for a kind of built-in and stealthy taper to happen. Pretty slick. And it does provide predictability.

Predictability right now is the name of the game. Broadly, the world's most powerful central banks are on trajectories that are pretty transparent and aren’t likely to change unless something big happens. The economies they manage are at different points on the trajectories, as alluded to by European Central Bank President Mario Draghi last week when he unveiled the ECB's cautious taper. (Oh, wait, I forgot, we aren't supposed to call it a “taper.”)

Kuroda deserves a second term. Chalk one up for predictability, though: Even if he’s out, his ideas are locked in.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

    To contact the author of this story:
    Daniel Moss at dmoss@bloomberg.net

    To contact the editor responsible for this story:
    Philip Gray at philipgray@bloomberg.net

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