July 20 2017, 20:00 JST

A fresh face may be needed at the BoJ helm

Kuroda maintains BoJ is still on course to achieve its target

In the press conference following the policy meeting on July 20, BoJ governor stuck to his message that the BoJ is staying the course, doing what it should to achieve 2% inflation target and that an inflation will eventually emerge in Japan as the economy continues to grow above its potential growth rate. Apart from the expected questions and expected answers, two following Q&As stood out from the press conference. 

-Asked what would happen to long term interest rates when the economy overheats, Governor Kuroda answered that BoJ will allow rates to rise in such a case, but he does not think the economy is already overheating. 

-Asked what he thought of the discussion regarding the policy priorities between an effort to achieve the primary fiscal balance and the effort to restrain the debt to GDP ratio, Governor Kuroda clearly said that the balancing the primary balance should be the priority. This was a shot across the bow to fiscal policy makers in Japan who seem to be seeking to relax their commitment to achieve a primary balance in 2020. How attentive Japanese fiscal policy makers are to the words of Governor Kuroda is a different story though.

Nobody wants BoJ to ease again, says a Nikkei reporter

And there was one memorable question from a Nikkei reporter. He stated that nobody wants an additional easing and the majority of population feel that there is nothing wrong with having a low inflation. He went on to ask Governor Kuroda if these sentiments could restrict BoJ’s ability to implement an additional easing. The reporter should have said “nobody within the Japanese financial industry”, but it is true that the series of aggressive monetary easing measures, including the 2% target itself, have been deeply unpopular among financial lobbies in Japan, especially among commercial banks. They have been voicing their preference to reverse some of the policy measures such as the negative policy rate, 10yr rate target and quantitative easing itself.

How strong is the staying power of Kurodanomics?

In our view, such open hostility against BoJ points to a fragility of the current policy framework. While the BoJ board may seem united under Governor Kuroda, the independence of Japan's central bank has been rapidly eroding in the recent years, in our view. Appointees to the BoJ policy board in the past few years were chosen not for their monetary policy expertise, but for their obedience to the current policy direction. The independence of the central bank has also been weakened at the staff level. We suspect that majority of the career BoJ officials feel their opinions were silenced by the current policy board headed by Governor Kuroda.

While such strong-handed management enabled Governor Kuroda to implement his policy thus far, it may backfire when the tide changes. When and if the government changes its policy preference, perhaps with the change at the top of the government, we could see BoJ policy board members starting to follow the new government, rather than Governor Kuroda. Also at the staff level, those BoJ officials who were not content with the policy thrust upon them by Governor Kuroda may be quick to follow the new direction. In this regard, the recent sharp decline in the approval rate of Prime Minister Abe is relevant to the monetary policy in Japan. Without a strong backing of the government, Governor Kuroda may not be able to withstand the pressure from financial lobbies in Japan. Governor Kuroda still command respects, but his credibility have been damaged in the last four years as inflation fail to materialize and as Governor Kuroda made a few strategic mistakes such as being publicly inconsistent on the possibility of adopting a negative rate policy.

BoJ may need a fresh face at the helm to keep its independence    

By April next year, Governor Kuroda as well as both the two vice governors are up for reappointment or replacement. In our view, it may be better for the stability of the monetary policy if Governor Kuroda is replaced with a fresh and more independently minded leader. In our view, professor Takatoshi Ito, currently at Columbia University, could be the one, but we will see how the mechanics of Japanese politics work.

In our view, the market has become too pessimistic on the chance of an emergence of inflation in Japan. We belive the next two years offer one of the last real opportunity for Japan to reflate itself, although a reflation will bring its own problems such as how the BoJ could manage its exit. While we have misgivings on the way Governor Kuroda handled the management of Japan's monetary policy, we do believe the framework of aggressive monetary easings with an inflation target has been the appropriate policy and we hope the framework will be kept in the next few years. We have a great respect of Governor Kuroda for taking Japan and the BoJ this far, but the BoJ may require a new face to give Japan a better chance of complete the grand project of reflating Japan. 

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