whatUroda Haruhiko Enter the Bank of Japan (boj) with a bang. After becoming governor in 2013, the former finance ministry official removed the “bazooka” of easy money in an effort to end decades of stagnation. The boj Committed itself to massive asset purchases to pursue the 2% inflation target and introduced negative interest rates. Together with then Prime Minister the late Abe Shinzo, Kuroda ushered in a new era of economic policy.
Mr. Kuroda’s tenure is also coming to an explosive end. Consumer-price inflation is above bojnine month target; It reached 4% in December, the highest level in 41 years. Authorities are aggressive — but the bank’s policy of “yield-curve containment,” a cap on ten-year government bond yields, is facing the fiercest counterattack since it was introduced in 2016. Mr Kuroda’s successor, to be announced in early February, must decide the future of policy and possibly oversee rate hikes. It requires skillful communication, impeccable timing and a lot of luck. Missteps could see Japan’s economy stagnate and return to deflation. They can also roll the global market.
The first question for the new governor is when to holster the bazooka. The bojA surprise decision in December to widen the trade band around ten-year bond yields, to allow more trading and improve market functioning, was seen as the start of the process. Predictably, the bookies tested the target, forced boj Buy more bonds. The bank’s holdings rose by a record ¥22 trillion ($169 billion) in the month to January 20 to total ¥561 trillion. At its meeting in January, the bank stood firm, but the fight is far from over. In a report on January 26, The imf Urges more flexibility around trade bands.
Mr Kuroda is said to have returned from the World Economic Forum in Davos more confident than ever in the bank’s Dovis approach. The boj In particular, high import costs of energy and food fueled inflation in Japan. These pressures may soon ease: energy subsidies will reduce costs; Global energy prices peaking and signs of slowing US inflation give cause for caution. Most importantly, wage growth has failed to keep pace with price growth. Real wages have fallen for eight consecutive months, plunging 3.8% in November from a year earlier, the biggest drop in nearly a decade. The bank estimates that inflation will fall to 1.6% for the fiscal year starting in April 2023 and only reach 1.8% next year.
A hawkish successor could also wait until later this year shunto Before changing course (annual wage negotiation). Japanese companies have long been reluctant to raise wages due to anemic growth. But in the face of prolonged inflation, business leaders are beginning to change their tune. Japan’s trade federation Keidanren urged members to pay particular attention to rising prices. Some multinational and large regional firms promise huge salary increases. Fast Retailing, the parent company of Uniqlo, a clothing giant, announced growth as high as 40%; Higo Bank, a regional lender based in Japan’s southern Kyushu, plans to raise base pay by 3%, the first such increase in 28 years. The question is whether small and medium enterprises, which employ 70 percent of Japanese workers, will follow suit. in any case, boj Officials see the cost of overshooting inflation as less than tightening too early and missing a historic opportunity to change Japan’s mindset on inflation.
The problem is that maintaining the current approach will only increase costs. The boj Some bond issuers now own 100%, leaving traders facing shortages. Against expectations, the bank found itself buying more bonds than before the introduction of yield-curve controls. That means buying them at their current high prices boj It will likely have large losses on its portfolio, especially if it has to sell bonds or raise short-term interest rates. Authorities want to slowly get out of control of the yield-curve. This could mean extending the band again, raising the ten-year target or moving to bonds targeting shorter maturities. In practice, it will be difficult. As experience with exchange rate pegs suggests, policy regimes can change quickly.
The boj Also the risk of inflation falling behind the curve and tightening quickly. Any normalization, much less a rapid one, would raise questions about Japan’s fiscal health. Some economists see Britain’s collapse under Liz Truss as a cautionary tale, highlighting the importance of maintaining faith in the reality of government. They worry about unknown unknowns in the financial system. Yet, the Japanese government has announced plans to double military and childcare spending without presenting any credible plan to finance these increases.
Who will inherit the mess boj? Three current or former deputy governors are the most on the list. Amamiya Masayoshi, Mr. Kuroda’s right-hand man, has overseen the bank’s monetary policy for years. A classical pianist, Mr. Amamiya will bring his intimate knowledge bojsheet music. Nakaso Hiroshi, who served as deputy for the first half of Mr. Kuroda’s tenure, is an expert on financial markets. He helped remove Mr. Kuroda’s bazooka, but came away thinking that monetary policy was no panacea and that more structural reform was needed to boost Japan’s potential growth rate. Yamaguchi Hirohide, who served under Mr. Kuroda’s predecessor, was a strong critic of overly lax policies. All three are seen as more hawkish than Mr. Kuroda, but while Mr. Amamiya and Mr. Nakaso represent a difference of degree, Mr. Yamaguchi will be a difference of sorts, signaling a desire for a clean break with the current regime.
The choice is in the hands of Japanese Prime Minister Kishida Fumio. His approval ratings have plummeted in recent months, leaving him in a vulnerable position within the ruling Liberal Democratic Party. Nominating an opponent of “Abenomics” like Mr. Yamaguchi would anger the powerful faction led by Abe. Whoever is chosen, however, faces a minefield. No candidate has ever led a central bank, let alone faced such a situation boj. Pushing too hard, too soon or waiting too long to act will be missteps with serious consequences. It is said that perhaps that is why all three are reluctant to take the post. As a government adviser on economic policy whispers: “One thing I don’t want is another boj Governor.” ■
