The news that Haruhiko Kuroda is almost certain to get a second term as Bank of Japan governor is less surprising than the indications of what he might do with it.
Granted, this is a significant moment. Kuroda, 73, is the first Japanese central bank governor to be given an Act II since the 1950s. Wisely, Prime Minister Shinzo Abe will stick with the man who, since 2013, has provided the wind beneath the wings of Tokyo’s revival scheme. Changing BOJ leaders now might interrupt efforts to, in Kuroda’s words, break the “deflation mindset.”
More surprising, though, may be the direction Kuroda 2.0 might take Japan’s borrowing costs: down, not up.
The chatter of recent months has been about BOJ tapering. With banks complaining about margins, bond traders irked by negative yields, BOJ largesse warping secondary-market dynamics and Japan enjoying its second-longest postwar recovery, it seemed like the time to withdraw. When you look at the team Kuroda 2.0 appears to be assembling, however, the odds favor more monetary stimulus.
Reports have quantitative-easing proponents Masayoshi Amamiya and Etsuro Honda joining as Kuroda’s deputy governors. That would probably mean more taps on the liquidity accelerator than on the brakes. The other bit of intrigue is why Abe dragged out his decision to renominate Kuroda for so many months. The likely reason: to extract a quid pro quo of continued QE to support Abenomics at a moment of maximum peril.
Even though growth has returned and corporate profits are hitting record highs, inflation is a good distance from the 2% target. Incomes, meanwhile, remain stagnant. Real wages, adjusted for inflation, dropped 0.5% in December from a year ago and 0.2% for all of 2017. Not surprisingly, domestic consumption is walking in place at a moment when Abenomics hoped spending would be sprinting ahead.
It’s hard to see Kuroda going completely off the reservation. However, the signals point toward him using his second act not to wrap up Japan’s QE program, but rather to broaden it
The disconnect reflects the glacial pace of moves to loosen labor markets, spark a startup boom, cut red tape, empower women and rekindle Japan’s 1980s innovative mojo. Other than modest tweaks to corporate governance, Abe hasn’t put any big reform wins on the scoreboard. Instead, he relied on massive BOJ easing and a weaker yen.
That strategy has largely run its course. The yen is now rallying – up 4.5% since January 1 – now that Donald Trump’s White House has signaled an end to America’s 23-year-old strong dollar policy. As the exchange-rate calculus changes, the Nikkei Stock Average has grown more volatile and racked up a 6.7% year-to-date decline. Hence Abe’s desperation for (a) another big easing blast from Kuroda’s team and (b) fast action to cap a yen that could make executives even less apt to fatten paychecks.
There are limits to what the central bank can do, of course. It has already cornered the government bond market and bought up 75% of the exchange-traded fund market.
To deliver fresh jolts to the credit system, the BOJ must get creative: by pushing its tentacles deeper into mortgage-backed, asset-backed and corporate debt. That could include some radical moves: buying large blocks of local government and municipal IOUs, and distressed assets (mothballed airports, stadiums, city hall buildings), and finding mechanisms to dole out cash directly to households. At the moment, banks are using BOJ cash to hoard government debt. To get really radical, Kuroda 2.0 could pull out Japan’s 1930s playbook and monetize debt.
A respected economist in his own right, it’s hard to see Kuroda going completely off the reservation, experiment-wise. However, the signals point toward him using his second act not to wrap up Japan’s QE program, but rather to broaden it.
Yen bulls won’t be happy and additional action alone won’t necessarily resurrect Japan’s animal spirits. Only bold structural upgrades by Abe’s team can do that. Even so, expect Kuroda to diverge even further from the Federal Reserve and other monetary powers’ hiking rates. Kuroda 2.0 promises to make for a fascinating, and active, 2018.