Asian Economy

Japan Keeps the Right Person to Run Its Central Bank

Abenomics required an end to timid monetary policy. Haruhiko Kuroda is providing it.

Sometimes the status quo makes sense.

Photographer: Stefan Wermuth/Bloomberg

It looks like one of the world’s best central bankers will get another term. Reports indicate that Japanese Prime Minister Shinzo Abe will nominate Haruhiko Kuroda for another term as head of the Bank of Japan. The decision to stay the course is just one more sign that things are going right in the Land of the Rising Sun.

It’s hard to overstate what a lousy state Japan’s economy was in before Abe and Kuroda arrived on the scene. The bursting of real estate and housing bubbles had led to a lost decade in the 1990s, and the 2000s had seen only an incomplete recovery. Growth in per capita incomes resumed, but wages stubbornly continued to fall, inequality rose, and the economy remained mired in deflation. The Great Recession dealt the economy a further blow, and just as it was recovering, an enormous earthquake and tsunami in 2011 devastated whole cities in the north of Japan, causing a nuclear disaster at Fukushima that temporarily shut down the country’s nuclear power plants. Hammered by nature, buffeted by the winds of the global economy, and weighed down by an aging and shrinking population, Japan was badly in need of dynamic, purposeful leadership.

It got it. Abe, elected in 2012, was widely expected to be a fire-breathing nationalist. Instead he focused mainly on reviving the economy, taking advice from maverick professors like Koichi Hamada of Yale University. With Hamada’s help, Abe envisioned a three-pronged policy to get the economy back on its feet -- monetary reflation, fiscal stimulus and a long-term program of structural reform. To implement the first “arrow” of what became known as Abenomics, the prime minister appointed Kuroda, at that time the head of the Asian Development Bank, to head the country’s central bank. In a break with his predecessors, who worried incessantly that easy money would lead to new asset bubbles, Kuroda was an outspoken proponent of monetary policy and a strident critic of Japan’s economic policy establishment.


From Day 1, Kuroda had a single mantra: to do “whatever it takes” to whip deflation. Again and again over the past five years, he has thundered those words. Economists believe that predictability, credibility and commitment are crucial to a central banker’s ability to move the economy. If Kuroda’s relentlessness doesn’t fulfill this requirement, nothing could. Determined to bring about inflation, he had the BoJ buy bonds, and more bonds, sending interest rates into negative territory:

Getting Paid to Borrow

Yield on Japan five-year government bonds

Source: Bloomberg

And he bought stocks, too -- more than 2 percent of the country’s stock market, so much that the head of the stock exchange complained that he was distorting the market. In response Kuroda’s stock binge eased only slightly. The central bank’s balance sheet has quadrupled in size under his tenure:

Now That's Using a Balance Sheet

Bank of Japan assets in yen

Source: Bank of Japan via Bloomberg

What’s curious is that in terms of his central objective -- raising inflation -- Kuroda hasn’t really succeeded. Japan escaped deflation, but only briefly was able to hit its target inflation rate of 2 percent:

Barely Positive

Japan year-over-year consumer price index, excluding food and energy

Source: Japan Ministry of Finance via Bloomberg

But this doesn't mean Kuroda has failed. His easing program may not have caused Japan’s prices to rise as fast as he’d want, but they’ve had other effects that have more than made up for it. One of these is that Japan’s currency has weakened, both against the U.S. dollar and in a trade-weighted terms:

A Weakening Trend

Price of one Japanese yen in U.S. dollars

Source: Bloomberg

The weaker yen has probably contributed to a rise in Japanese exports:

That's What a Weaker Currency Will Do

Japan exports in yen

Source: Japan Ministry of Finance

Japan is famous for its exports of high-value-added manufactured products like cars and machine tools. But thanks to the weak yen the country is also experiencing a tourism boom, netting the country about $40 billion a year as Tokyo streets and mountain hot springs are choked with visitors from the U.S., China, France and elsewhere.

Cheap money has also helped with Abenomics’ other two arrows. Negative interest rates allow the government to avoid tax hikes that could damage the economy -- the longer interest rates stay at or below zero, the more the government’s interest costs go down over time.

Meanwhile, low interest rates are allowing Japan’s private equity industry to finally take wing. Cheap borrowing is making it easier for big companies to spin off and restructure money-losing divisions, and for small family businesses without heirs to sell themselves to professional managers. Structural reform -- the third arrow -- means corporate governance reform, and cheap money greases the wheels of the ownership changes that will help that process along.

And the results of all this are showing. It’s clear that Japan’s economy is doing better than it has done in a long time -- probably since the 1980s. Business confidence recently hit an 11-year high, and private investment has risen steadily:

An Unmistakable Trend

Japan real private nonresidential investment in yen

Source: Japan Ministry of Finance

Of all three arrows of Abenomics, Kuroda’s monetary policy has to take the most credit for Japan’s turnaround so far. It was far more dramatic than fiscal stimulus, which hasn’t really increased in Japan since Abe took office. And it took effect much more quickly than structural reform.

Kuroda’s tenure has been a testament to the powers of determined, committed monetary easing, and should stand as an example to central bankers in Europe and the U.S. Luckily for Japan, his bold stewardship looks set to continue.

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

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