BoJ puts the ball in Abe’s court

JAPAN’S central bank chief has predicted victory in his battle to root out the deflation that has long sapped economic vitality.

Kuroda’s monetary bazooka.

JAPAN’S central bank chief has predicted victory in his battle to root out the deflation that has long sapped economic vitality in the world’s third-largest economy, but expressed impatience with the government’s pace in cutting red tape and encouraging businesses to invest more.

“Implementation is key, and implementation should be swift,” Bank of Japan governor Haruhiko Kuroda said in an interview with The Wall Street Journal. “The major work to be done is by the government and the private sector.”

Mr Kuroda’s comments mark an important shift in tone more than a year after he was tapped by Japanese Prime Minister Shinzo Abe to engineer a newly aggressive monetary policy. The resulting “bazooka” of stimulus actions, ­including the purchase of trillions of yen in government bonds and other assets, has fuelled Japan’s longest economic growth streak in nearly four years and a steady stream of positive inflation readings.

Despite signs of progress, Mr Kuroda warned in the interview that the longer-term triumph could be relatively hollow if Mr Abe doesn’t step up his campaign for deeper, structural changes that go far beyond monetary policy. Unless the Abe administration follows through soon, “the real growth rate may be disappointing”, Mr Kuroda said.

“That is not good for the economy, not good for the society.”

When Mr Kuroda became Bank of Japan governor in March last year, he promptly fired what he called his monetary “bazooka”, a sharp increase in stimulus. Japan’s economy has shown signs of stirring from its long slump, but investors and private forecasters question how far Mr Kuroda can go in defeating deflation.

In response to the prod for more action, Mr Abe said in a separate interview with the Journal that he already had moved aggressively to shake up entrenched sectors of Japan. Additional proposals will be unveiled in late June.

“We have implemented complete liberalisation of the retail electricity market” and scrapped a 40-year-old subsidy to cut rice planting, Mr Abe said.

“Many of these were areas where reform was believed not possible, but we’ve made them happen.”

Mr Abe added: “Structural reforms are a never-ending theme for the Abe administration.”

Mr Kuroda also signalled concern that a sustained rise in the value of the yen could undermine gains already made.

While previous Bank of Japan governors have traditionally avoided openly discussing exchange rates, Mr Kuroda said investors shouldn’t expect the yen to rise further, even as it flirts with its highest levels in months. “I don’t think it’s reasonable to expect the yen to appreciate against the dollar,” he said.

Mr Kuroda’s comments were a strong sign that he plans to tackle broader issues that traditionally haven’t been part of the Bank of Japan’s turf, even if that means taking a more aggressive tone than Mr Abe. The Prime Minister put Mr Kuroda, a financial policy veteran and longtime critic of the central bank, in charge of the Bank of Japan in March last year.

Mr Kuroda said Japan needed to open the way to more foreign ­labourers and keep women in the workforce after they have had children.

Japan has long restricted immigration and hesitated to let companies lay off workers easily.

He also called on Mr Abe to stick with a plan to curb Japan’s swollen debt and proceed cautiously with his corporate tax-cut proposal.

A sharp drop in the Japanese currency last year helped curb falling prices by boosting import costs — and helped exporters by making their goods more competitive in global markets. Recently, though, the yen has shown signs of reversing some of last year’s declines.

Japan’s gross domestic product has grown for six quarters in a row, and spending seemed to weather a sales-tax hike in April better than expected. Consumer prices in March rose 1.3 per cent from a year earlier, reversing a 0.5 per cent drop posted in March 2013.

Yet many investors and Japanese are sceptical about how long the good news will last. The Nikkei Stock Average is down more than 10 per cent so far this year. Critics claim the central bank’s stimulus actions fuelled a fragile resurgence that now requires a thorough overhaul of Japan’s economic structure.

“Monetary policy is having the desired effect — and it’s large,” said Adam Posen, a longtime expert on Japanese economic policy and president of the Peterson Institute for International Economics in Washington. “But like many people, I’m disappointed in the pace of reform.”

Until recently, the 69-year-old Mr Kuroda had largely confined his comments to monetary policy, the typical script of central bankers and the first of “three arrows” in the Prime Minister’s so-called Abenomics policy. In the interview, Mr Kuroda said his dramatic decision last year to double the cash pumped out by the Bank of Japan has produced durable inflation. He projected confidence that Japan is on track to hit his target of 2 per cent inflation by next year. If progress starts to slip, “we are open-ended,” he added, expressing readiness to do still more.

By itself, though, the policy could at best steer Japan to a lacklustre growth rate that is considerably slower than the US and more on a par with the most troubled European nations, he said.

“Our medium-term potential growth rate is less than 1 per cent,” he said. The growth rate has fallen as Japanese companies shift factories elsewhere and population declines. “Unless this growth potential is raised, the end result may be only the 2 per cent inflation target achieved, but real growth is meagre.”

In the late 1980s, Japan experienced one of the modern era’s great growth bubbles — and then fell into two decades of doldrums. In recent years, the troubles of once-proud companies such as Sony and the country’s declining population have fed fears of an inexorable decline.

Weak inflation is seen as a symptom of stagnation, depressing wages and profits. Stagnant prices make it harder for households and companies to pay off their debts and discourage consumption and investment.

Japan is the world’s only major economy to be hit with outright deflation, yet the Bank of Japan long argued that it lacked the power to fix Japan’s ailments. Mr Abe made bashing the central bank a pillar of his successful 2012 campaign for prime minister. After his political party won a landslide victory, Mr Abe turned to Mr Kuroda.

In his first day on the job at the central bank, Mr Kuroda told employees: “There is no other country in the world where deflation has continued as long as 15 years.”

Since then, Japan has intervened even more aggressively by some measures than the Federal Reserve, European Central Bank and Bank of England.

The Fed has accumulated assets worth roughly 25 per cent of annual US economic output. In Japan, “we are expecting the size of the central bank’s balance sheet is reaching closer to 60 per cent” by year-end, Takumi Shibata, chief executive of Nikko Asset Management, told Mr Kuroda earlier this month. “That’s sort of uncharted territory.”

Behind Mr Kuroda’s revolution is the belief that the Japanese central bank’s challenge lies as much in changing psychology as the economy. Raising inflation and inflation expectations is a crucial step in carrying out policy, he believes, along with traditional strategies such as boosting bank lending.

Under the “deflationary mindset” that has gripped Japan for two decades, companies have felt safe sitting on their cash hoards, while consumers have been reluctant to spend or invest. Mr Kuroda believes changing that mindset would build a virtuous cycle of higher investment and consumer spending.

“Looking at history … there were not many cases in which people’s inflation expectations shifted dramatically in a short period,” he told Japanese business leaders in a Christmas Day speech. “Those cases were underpinned by a bold policy regime change.”

He compared his quest to then-Fed chairman Paul Volcker’s attack on rampant inflation and the Depression-fighting New Deal under president Franklin D. Roosevelt.

Mr Roosevelt’s upbeat style amid adversity seems to be a model for Mr Kuroda and is a contrast with his bookish predecessor at the central bank, Masaaki Shirakawa, who rarely cracked a smile.

Mr Kuroda speaks with a broad grin, theatrically waving his hands to illustrate data trends, and regularly responds at news conferences by throwing his head back in a loud laugh. He demands far less from Bank of Japan researchers and speechwriters, aides say. Mr Kuroda’s pronouncements are made in unhedged language. He bats away questions about risks.

Mr Kuroda has a fascination dating back to high school with Karl Popper, the 20th-century Anglo-Austrian thinker who argued about the fallibility of human knowledge and the technique of disproving theories through “falsification”

Mr Kuroda has translated Mr Popper’s works into Japanese and wrote an afterword to a Popper reissue last year. “I have often found that reality and theory do not match,” the central banker wrote in a newspaper essay on Mr Popper. “Falsification teaches me the importance of being flexible, rather than absolutely counting on a theory.”

On April 30, the Bank of Japan projected inflation of 1.9 per cent for the fiscal year starting April 2015 and 2.1 per cent for the following year. Analysts aren’t as optimistic. In May, the independent Japan Centre for Economic Research said its consensus forecast projects inflation of just 1 per cent next year.

Inside the central bank, Mr Kuroda hasn’t faced a single policy dissent during his 17 board meetings, but three of the nine panel members have regularly challenged his forecasts in some form. Japan’s central-bank chiefs serve a five-year term and are largely independent.

The varying inflation forecasts have contributed to volatility in Japanese financial markets. Investors who think the central bank will miss its inflation target are betting that more monetary stimulus will be needed, but Mr Kuroda has defied those predictions so far.

Mr Kuroda and his aides say sceptics are failing to grasp changes in the Japanese economy that now are stoking inflation, a sign of progress.

“Inflationary expectations have also, although gradually, risen. That has already affected wage- and price-setting behaviour by companies,” Mr Kuroda said.

Budding optimism also is creating the foundation for Mr Abe to carry out the difficult changes needed to raise the efficiency of Japan’s economy in the long run, Mr Kuroda said. “We are now in a new situation,” he said, citing the tight labour market and rising wages and prices. “I think this really is a golden opportunity to make those structural reforms.”

Additional reporting: Takashi Nakamichi and Tatsuo Ito