Debating central-bank independence in Japan is just so quaint.
Really, good luck arguing a monetary authority that cut interest rates to zero in 2001 and essentially left them there since it enjoys autonomy. Such delusions ignore why Haruhiko Kuroda was chosen to run the Bank of Japan in 2013.
Everyone knew Prime Minister Shinzo Abe wanted the BOJ to flood the world with yen. To give Tokyo’s quantitative-easing explosion an air of legitimacy and avoid a capital flight, Abe needed a respected economist. The Oxford-trained Kuroda, a former Finance Ministry bigwig, provided gravitas. And he didn’t disappoint. The yen’s plunge boosted exports and the Nikkei 225 Stock Average is up 110% on Abe’s watch.
Now, the clock is ticking down to Abe’s ouster amid scandals and support rates in the 20s. That’s sparking debate about whether the Kuroda BOJ might soon think for itself.
The BOJ’s April 26-27 policy meeting may be a unique one. For one thing, political risk will be on the discussion table. That’s a real oddity in the Abe era that began in 2012, a remarkably stable period. Yet Abe’s hopes of becoming the longest-serving leader come September are dwindling with his popularity.
One problem is a cronyism scandal involving public land sold at an 86% discount to a school with ties to Abe’s wife. Another: Abe’s sycophantic bet on Donald Trump’s erratic White House is running afoul of voters.
Conventional wisdom is that Abe’s departure won’t matter to the BOJ, not with Kuroda & Co. only halfway to its 2% target. Yet as former BOJ board member Takahide Kiuchi told Bloomberg: “If the unusually strong administration changes, the Bank of Japan could get a little more freedom.” The BOJ, Kiuchi claims, faced “considerable political pressure” these past five years.
Polls show voters want Shigeru Ishiba, a security hawk and former defense minister, to replace Abe. As leader, Ishiba would almost certainly be more attuned to taking on North Korea than micromanaging monetary policy. Under a new government, Kiuchi says, “it could become easier” to re-frame inflation timelines. That could include the BOJ throttling back on annual bond purchases.
This risk explains why the yen often rallies and Nikkei stocks fall at moments when Abe’s prospects appear to dim. Say what you want about Abenomics, the outlook for the BOJ’s epic QE program would be in doubt should he fall on the proverbial sword.
Within reason, of course. Any hint of BOJ tapering panics exporters. The most obvious missing Abenomics link is wage growth. Despite unemployment at 25-year lows and the longest expansion since the 1980s, income gains remain tepid, at best. Fears of a stronger yen, a product of BOJ tapering, could reduce executives’ confidence to fatten paychecks.
Also, Trump’s trade war is already sending strong headwinds Japan’s way. In March, exports only rose 2.1% from a year earlier, less than half what economists predicted (imports fell 0.6%). And according to a Reuters poll, Japan’s gross domestic product slowed markedly in the first quarter — to 0.5% from 1.6% in October-December period. So, Kuroda’s latitude to withdraw liquidity seems limited.
Even so, Kuroda is concerned the BOJ has gone too far in the direction of cornering markets. It holds about 45% of outstanding government bonds and 75% of exchange-traded funds by late 2017. That’s warping trading dynamics and creating moral-hazard risks. It makes finding an eventual exit even harder.
As a smart economist, Kuroda must’ve noticed that ultraloose money policies are proving no match for reforms that enliven innovation, spark a startup boom and loosen labor markets — all things Abe never got around to doing. Some recalibration on central bank policies may indeed be warranted.
And soon, Kuroda may get his chance to plot a more independent course. If we do see a changing of the guard at the prime minister’s office, markets had best buckle those seatbelts.