November 19, 2014, 19:30 JST

Why the sulky face, Mr Kuroda?

The Bank of Japan kept its policy unchanged on November 19. The decision was a 1-8 split, with the member Kiuchi arguing to cancel the QQE2 and drop the 2% inflation target. In the press conference after the meeting, the BoJ governor Kuroda took pains to maintain the distance between the bank and the government in order not to appear to criticize Prime Minister Abe’s decision to postpone the sales tax hike and also to refute the criticism that the BoJ is simply bankrolling the fiscal deficit.

Reporters repeatedly asked Mr Kuroda what he thought of the tax hike postponement and Mr Kuroda simply repeated that the decision belongs to the government and the central bank continues to expect the government to strive to maintain its fiscal discipline. When asked on the economic outlook, he dished out his usual positive spiral story where the tighter labor market in Japan leads to higher wages and a more buoyant economy. There was something unusual with the Mr Kuroda's body language today though. He is usually quite cheerful, often chuckling to tricky questions from the press. Today, he seemed unusually sulky.   

One straightforward interpretion is that he was sulky because the government disappointed, or even betrayed, the BoJ by not trying hard enough to balance the budget. The BoJ implemented a massive QQE2 on October 31 in the belief that the monetary policy has to compensate for the negative shock from the 2 consecutive years of sales tax hike.

We have a different interpretation though. He was merely pretending to be sulky. While it is hard to judge how much Mr Kuroda anticipated PM Abe’s decision to postpone the tax hike, but as a successful career policy maker, we would expect him to have known that Mr Abe could cancel the sales tax hike. Mr Kuroda was probably not opposed to the postponement of the tax hike. Why should he be? If the government were to go ahead with the tax hike, the 2% inflation goal would have been even harder to achieve. Now that the tax hike is gone, the BoJ has a strong fighting chance to achieve its inflation target by the end of 2016, if not earlier.

Why are we talking about the mood of Mr Kuroda? Because we think it has a policy relevance. Some may argue that the BoJ was disappointed with the government’s decision to postpone the tax hike and the central bank is now less willing to ease again. We do not agree with such proposition. During the press conference, Kuroda commented that the managing the fiscal sustainability is the responsibility of the government and the BoJ has nothing to do with it. We suspect that was indeed his honest take of the situation. The government just made the job of the BoJ easier, but Mr Kuroda was making the sulky face to maintain the pretence that the BoJ does not enjoy bankrolling fiscal deficits. In our view, Mr Kuroda actually knows that is exactly the role BoJ should play in order to inflate the economy. If we are to ask him knowingly "Why the Sulky face, Mr Kuroda?" in private, we imagine he would probably smile with his usual chuckle.