'More of the Same' Isn't an Option for the Bank of Japan
The reports that Haruhiko Kuroda will be reappointed as Bank of Japan governor say as much about the path Japan is on -- and its dangers -- as they do about the man.
A Japanese long weekend began with reports from Nikkei and Kyodo News that Prime Minister Shinzo Abe will give Kuroda something none of his predecessors in the past four decades received: a second term at the helm of the central bank. It's tempting to see this as a sop to financial-market stability. The last thing investors needed was a change; Kuroda's chances of a second stint were high, and last summer I endorsed another turn.
For all the progress under Kuroda, the hardest part lies ahead. The BOJ has the unenviable task of acknowledging Japan's sunny economic spot and at the same time convincing stakeholders that none of the huge stimulus will be removed anytime soon. The central bank's response to skepticism has been to shut down any discussion of what comes next: flood the fixed-income market with money to keep the yield on the 10-year Japanese government bond at zero and assert the problem lies not with policy but with idiots who don't understand it.
Officials won't even begin a conversation about how healthy the economy might be before the easing might be tempered. I wrote before last week's market tumult that the BOJ was missing an opportunity. That's still the case. Free now from the need to play safe while Abe deliberated, Kuroda should make this his first strategic priority. He doesn't have to articulate an exit sequence overnight, but he is obliged to outline one in the next few years if things remain on their present course.
Japan is in its best shape in years. Its economic expansion is the longest since the mid-1990s, the unemployment rate is below 3 percent, and capital spending by companies is on the way back. At least part of this reflects the synchronized global upswing. The biggest knock is that for all the stimulus of Kuroda and his predecessors, inflation isn't close to the 2 percent target. The good news is that it's heading in the right direction. People no longer talk about Japan being in a deflationary spiral.
For all its stumbles in the past few decades and its enormous demographic challenges, Japan remains the world's third-largest economy. It would be tempting to see Kuroda's return as something of a victory lap for the nation.
That would be a huge mistake. Are we to believe that everything remains frozen until inflation hits 2 percent and then it all just somehow goes away? Not just the bond buying at the heart of quantitative easing, but the panoply of tools deployed to buttress QE? Included in this armory are purchases of exchange-traded funds and real-estate investment trusts. Should some of this be phased out before the 80 trillion yen annual bond purchase target is amended? Which of these, if any, would come before the 10-year yield target is tweaked?
It's clearly easier to get into radical easing than it is to withdraw from it. But Kuroda has shown he's capable of a course correction. The most recent was in 2016 when, after a number of splits on the BOJ board, Kuroda ordered a rethink. As a result, "yield curve control" was born. Instead of policy being based on an amount of money pumped into the economy, the focus would shift to maintaining the 10-year bond at a certain level. For now, around zero.
After a decent interval, presuming markets have calmed, the reappointed Kuroda should undertake another review -- this time, aimed at articulating an exit sequence and the conditions that would have to be satisfied to begin that.
While Abe might have been looking for a stable and quiet path by going with Kuroda again, the governor would do the prime minister and Japan a disservice by staying silent.
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