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Central chief wanted unanimous support from his board for a radical monetary plan to pull Japan out of the economic doldrums Kuroda’s calculus: How the staged its big bang

Bay Leik Kihara , April 30, 2013

DEFLATIONARY DARK DAYS: Japan’s new governor Haruhiko Kuroda hopes his radical easing plan will lead Japan out of two decades of economic stagnation. REUTERS /Issei Kato

SPECIAL REPORT 1 BANK OF JAPAN Kuroda’s calculus

KURODA’S HIDEAWAY: Kuroda met secretly with board members at the central bank’s Hikawa-ryo retreat in Tokyo. REUTERS/Issei Kato

rom the moment he assumed the job would show the BOJ now meant business. officials who had agitated behind the scenes in March, Bank of Japan Governor In a two-week whirlwind of meetings, for a more aggressive policy for months. It is FHaruhiko Kuroda had a number in according to people with knowledge of far too early to know whether Kuroda will mind: 9. The number had nothing to do those deliberations, Kuroda won over the conquer , but the story of how he with the scale of the bank’s stimulus plan, four holdouts on the policy board for the won his first battle suggests the new gov- which the market had been buzzing about. biggest attack on stagnation by any central ernor has galvanized internal support for It was a vote target. bank in recent years. The campaign kicked the long fight ahead. This account is based The central bank’s policies are determined off at a secret weekend retreat in downtown on interviews with more than a dozen cen- in votes by its nine-member board, chaired Tokyo, inside a former BOJ dormitory. tral bank insiders before, during and after by the governor. And Kuroda wanted all On April 4, the board gave him his Kuroda’s first days at the central bank. eight of his colleagues to back his controver- 9-0 win. The degree to which Kuroda de- “MR. SPOCK” sial plan to jolt Japan out of its long slump by livered on his promise, and the extent of flooding markets with cheap . his support, stunned financial markets. The Kuroda’s central idea is a more determined Only weeks before Kuroda joined, the impact was exactly according to script: The version of the U.S. ’s “quan- board had voted 8 to 1 against a plan for yen went into a precipitous slide, Tokyo titative easing,” which involved pumping bold monetary easing. Now, vocally backed stocks extended a five-month rally, and vast amounts of money into the American by a new prime minister, Kuroda knew the government-bond yields fell to record lows. financial system. His plan calls for the arithmetic had moved in his favor. He was The dramatic vote swing highlighted BOJ to roughly double annual purchases joining the board with two new deputies. both the power of Kuroda’s nerdy charisma of Japanese government bonds to a half- They plus two sympathetic veterans on the and the influence of a group of senior BOJ trillion dollars and double its purchase of board gave the new governor a 5-4 edge. riskier assets in two years. But Kuroda wanted unanimous support. The aim is to push down long-term His recipe was radical: double Japan’s They are burning markets interest rates, encourage companies and in two years, and promise to to the ground, reducing them individuals to borrow, and induce inves- ignite 2 percent inflation in two years, re- to ashes tors to seek higher returns, in the equity versing nearly two decades of falling prices. markets for instance. Investors doubted the cautious BOJ had the Hideo Kumano The 68-year-old Kuroda seems an un- stomach; Kuroda calculated that a 9-0 victory chief economist, Dai-Ichi Life Research Institute likely change agent. A cerebral retired

SPECIAL REPORT 2 BANK OF JAPAN Kuroda’s calculus

Easy money Haruhiko Kuroda, tasked with a “regime change” at the Bank of Japan by Prime Minister Shinzo Abe, stunned markets on April 4 when the BOJ announced it would pump $1.4 trillion into the economy to end two decades of stagnation. It sent the yen to its lowest in almost 4 years.

JAPANESE YEN/DOLLAR Kuroda’s start Nov 2012 Dec Jan 2013 Feb Mar Apr 75

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Kuroda's November 14th 85 lower house Prime Minsiter confirmation Yoshihiko Noda hearing says he will December 16th 90 call an election Shinzo Abe’s in December party wins landslide 95 election BOJ officials preparing for possible emergency meeting 100 Kuroda, two deputies take office at BOJ BOJ board holds a secret meeting over the weekend at Hikawa-ryo former dormitory 105 Kuroda struggles for consensus, is summoned to parliament BOJ decides radical reflationary policies BOJ meets with on policy impact Source: Thomson Reuters

Ministry of bureaucrat with a elite Monetary Affairs Department watched bonds the central bank would buy to five master’s degree in economics from Oxford, a closed-circuit video feed from the seventh years or longer, up from three years.. he doesn’t pound tables or raise his voice, floor of the central bank’s headquarters to By the time Kuroda finished his nearly say people who have worked with him. His take stock of their incoming boss. three-hour session, it was clear both of those analytical bent reminds one former associ- It was a month before the new BOJ proposals were effectively dead. Wearing a ate of “a Japanese version of the Mr. Spock board’s first policy meeting. The bureaucrats dark suit and a black tie with silver stripes, character” from Star Trek. had drawn up three scenarios, knowing time Kuroda appeared subdued. But his tone was But Kuroda has been a relentless critic would be tight. The first was a relatively tame authoritative, and confirmed much of what for 15 years or more of what he saw as increase in asset purchases; the second was the watching bureaucrats had suspected: the BOJ’s lack of decisive action in the a bolder proposal to extend the duration of Kuroda would come out swinging. face of a stalled economy. That stance was They realized he wanted the bank, over what prompted the new prime minister, the next few weeks, to come around to the Shinzo Abe, to whisk him away from the most radical of the set of options they had top job at the Asian Development Bank. imagined: to buy bonds of all maturities Career BOJ officials got an inkling of ¥270 trillion and boost purchases of riskier assets, such what Kuroda had in mind on March 4, when as exchange-traded funds and real-estate The BOJ’s monetary base target he appeared at his first confirmation hearing to achieve 2 percent inflation in investment trusts. The only question was in a cramped committee room at the lower whether the rest of the board would follow house of parliament. Members of the BOJ’s two years the incoming BOJ chief.

SPECIAL REPORT 3 BANK OF JAPAN Kuroda’s calculus

NOW START SHOPPING: The central bank is trying to get Japanese to step up their shopping to pull the country out of deflation.REUTERS/I ssei Kato

Three days later, the BOJ board met for referendum on the BOJ, and the BOJ lost. previously shared his caution, proposed its last policy review under the retiring gov- In January, Shirakawa was dragged into starting the open-ended bond-buying im- ernor, . It stood pat on accepting Abe’s call to double the bank’s mediately. Board member Ryuzo Miyao policy. Overnight interest rates – the bank’s inflation target to 2 percent - even though proposed committing the BOJ to main- primary tool – were already essentially at prices were still falling, and the BOJ’s own taining zero interest rates until the 2 per- zero. Shirakawa had been openly skepti- forecasts showed inflation wouldn’t ex- cent inflation target was “in sight.” cal about how much more the central bank ceed even 1 percent for the next two years. But without a leader willing to catalyze could do, especially if the government didn’t Central bankers hate setting difficult goals: the growing readiness for change, both match fresh monetary easing with structural Failure can undermine their credibility dovish proposals were voted down 8-1. reforms of the economy, such as cutting red with the public. Credibility, in turn, is ev- PUSHING ON AN OPEN DOOR tape and freeing up the labor market. erything. If a central bank can make people It was a stance that frustrated some se- believe inflation is coming, for instance, More signs of movement came on March nior BOJ officials, who like Kuroda, wanted that very expectation might spur people to 12. The more conservative of the two nomi- a more radical approach. “What we had to buy things before they grow expensive – a nees to be Kuroda’s deputy governors, ca- change was the incremental approach to self-fulfilling prophecy. reer BOJ civil servant Hiroshi Nakaso, ,” one said. Shirakawa reluctantly engineered an en- said in his confirmation hearing the bank Shirakawa had been under intense pres- hanced, “opened-ended” round of quantita- “shouldn’t be bound to precedents and must sure the past year to give ground. Abe rode tive easing, though he set it on timed release. think with a new mindset.” Nakaso had al- to power in December’s election on a cam- The additional asset purchases would begin ways warned of the dangers of loading the paign that focused on ending Japan’s debili- more than half a year after he left office. BOJ’s balance sheet with too much long- tating price declines and bashing the central At Shirakawa’s last board meeting, on term debt. Now, he acknowledged the bank bank. The vote turned into an unexpected March 6 and 7, Sayuri Shirai, who had could have done more to beat deflation.

SPECIAL REPORT 4 BANK OF JAPAN Kuroda’s calculus

Nakaso was cast in the Shirakawa mold with knowledge of the deliberations. but he was a realist. He would accept the tide’s The board was largely agreed on the turn toward “,” but would fight for need for bolder action - even if they were the things the central bank most wanted to divided on how to do it, the officials said. preserve. The first was the BOJ’s statutory in- Kuroda was helped by the fact that board dependence, granted in a 1998 law that critics members were under extraordinary pres- – including, for a time, Abe himself – were sure not to appear to be resisting the will threatening to rewrite. Also vital for Nakaso, of the Japanese people, who had given Abe who as a BOJ bureaucrat had engineered the DOUBLE THE MONEY: Under the BOJ’s stimulus a strong electoral mandate. Lawmakers had end to a previous spell of plan, Japan will double its monetary base over repeatedly warned they would overhaul the in 2006, was the need to work on an exit strat- the next two years. REUTERS/ Yuriko Nakao bank’s legal charter if board didn’t wage all- egy for Kuroda’s program. out war on deflation. Kuroda’s other nominee for deputy, “The board members may have thought Kikuo Iwata, was, if anything, more com- familiar with the deliberations told Reuters they should vote as one to show their deter- mitted than his new boss to radical refla- about this previously undisclosed meeting. mination to achieve 2 percent inflation, or tionary tactics. The academic economist The getaway is the central bank’s place of face threats of a revision to the BOJ Law,” had branded the BOJ as “The Guardians of choice when privacy is paramount. said prominent BOJ watcher Izuru Kato, Deflation” in a book last year. He now was Obscured behind earthen walls, chief economist at Totan Research. pushing for the unorthodox idea of target- Hikawa-ryo appears to be an oasis of soli- Moreover, a consensus was beginning ing not just the size of the BOJ’s balance tude from outside its wooden gate. Inside, to form, and bucking a consensus in Japan sheet for expansion, but also a measure of Kuroda’s focus that weekend was to hear takes guts, said Miyako Suda, a former Japan’s entire money supply. out the doubts of the four BOJ board BOJ board member who sometimes voted Kuroda would make no formal contact members who were not yet in the reflation- against boosting bond purchases in the with the protocol-sensitive BOJ before his ist camp. past. “It’s tough, particularly if you’re vot- March 20 inauguration. But staffers were One of them was former Nomura ing against monetary easing. People like it already hard at work anticipating policies Securities economist Takahide Kiuchi, who when central banks ease policy, so you need he might want. worried about the risks of giving the gov- courage to vote against it,” she told Reuters. Again there were three scenarios. But in a ernment a blank check to issue new debt. Two of the four unconvinced board sign of how rapidly the game was changing, During its long slump, Japan has run up the members - former market economist even the most modest plan - increasing an- largest ratio of debt to economic output of Takehiro Sato and banker-turned-policy- nual Japanese government bond purchases any advanced economy, some 200 percent maker Koji Ishida – to some extent had by 30 trillion yen ($300 billion) - was far – double the ratio of the United States and already supported Kuroda’s calls for radical more radical than the Shirakawa era, when exceeding even the 170 percent of Greece. monetary expansion and a departure from a big increase was 10 trillion yen. Even that In the discussions, Kuroda took care not Shirakawa’s incremental approach. wouldn’t be enough for Kuroda, who would to appear to be imposing his will in steering But Sato was deeply suspicious about also reject a 40-trillion yen plan. He insisted the debate, listening carefully and with a re- incoming Deputy Governor Iwata’s calls to on the biggest option - boosting debt pur- assuring smile to what everyone had to say. target the monetary base – the sum of Japan’s chases by 50 trillion yen ($500 billion) a year. “He’s a good listener,” one BOJ official said. cash in circulation plus deposits that com- Kuroda now had on his side his two As he used the retreat to launch his mercial banks hold with the BOJ. Sato ar- deputies and willing accomplices in board push for a unanimous vote, Kuroda also gued this would essentially be a reversion to members Miyao and Shirai, the former ac- let it be known he was unwilling to delay the bank’s quantitative easing of 2001-2006, ademics who had proposed policy tweaks at the big decision, even if that meant split- an episode that had failed to end deflation. the previous meeting. That gave him a 5-4 ting the board vote, according to officials The other doubter, Ishida, thought more majority for his big-bang plan. time was needed to deliberate on the po- At that point, Kuroda decided to gather tential consequences of such a momentous Follow Reuters Special the new board for the first time at a week- Reports on Twitter: overhaul of BOJ policy. end retreat at Hikawa-ryo, a former BOJ @SpecialReports A third board member, Yoshihisa residence near the Syrian embassy, people Morimoto, a former electric-power

SPECIAL REPORT 5 BANK OF JAPAN Kuroda’s calculus

executive, wasn’t opposed to further easing, with four bullet points, each with the num- banks that would be on the receiving end but he balked at the sheer size of the pack- ber 2 highlighted in red: 2 percent inflation of the BOJ’s fire hose of liquidity. age. He questioned whether the BOJ really in two years; a doubling of the monetary BANKS BLINDSIDED needed to do so much in a single go. base; and at least a two-fold increase in the Kiuchi, the former Nomura economist BOJ’s bond holdings and average maturity. The BOJ’s decision to deluge financial mar- and debt hawk, worried that loading up the He later said nothing was “magical” kets with cash sent the benchmark Nikkei BOJ’s balance sheet with so much long- about the number 2, but repeatedly said Stock Average to a near five-year high. The term debt would complicate an eventual at his news conference he wanted the new yen went to a four-year low to around 100 exit from an ultra-easy policy. He wanted policy to be “easy to understand”. to the dollar. The 10-year bond yield hit a the BOJ to issue guidance to the market Kuroda got almost everything he want- record low 0.315 percent before rebounding. that its massive bond-buying would not ed. The only hint of dissent was board Major banks were blindsided, in part be- mean the bank was monetizing govern- member Kiuchi’s lone - and unsuccessful - cause they hadn’t been consulted on the mar- ment debt – printing money to repay it. plea to water down the BOJ’s commitment ket implications of the central bank’s massive The retreat ended without the unani- to hitting its inflation target in two years. asset purchases. In the past, the BOJ had mous endorsement of his plan that Kuroda “All the board members talked about this worked out details of its asset-buying opera- was seeking. and came to the conclusion that instead of tions after sounding out the banks in detail In the two days leading up to the land- to cushion the potential market impact. The mark April 3-4 policy meeting, Kuroda central bank skipped that process this time began working the library-quiet eighth because of Kuroda’s urgency in getting his big floor of the BOJ headquarters, where board bang plan approved at his first board meeting. members have their offices. When the BOJ summoned executives A habitual organization man from his of major banks for a meeting on April 11, decades at the Finance Ministry and his the bond market was in gyrations. Some eight years heading the Asian Development bankers complained the BOJ was on the Bank, Kuroda met each board member in verge of crowding them out of the 900-tril- his or her office. He sought to allay their re- lion-yen JGB market, making it harder for maining concerns, while insisting the bank banks to buy the bonds they have relied on needed to send a “simple, clear” message BOJ BASHER: Prime Minister Shinzo Abe won a during a decade of slow growth as a safe- with its decision, according to the officials landslide in December’s election by relentlessly haven substitute for loans. with knowledge of those talks. focusing on the failure of the Bank of Japan “It’s actually scorched-earth tactics,” said He knew the importance of presenta- to shake Japan out of its economic doldrums. Hideo Kumano, a former BOJ official who is tion. Shirakawa had tended to diminish REUTERS/ToRU HaNaI now chief economist at Dai-Ichi Life Research the impact of his 14 easing decisions by Institute in Tokyo. “They are burning markets talking down their significance in profes- taking incremental steps, the BOJ would to the ground, reducing them to ashes.” sorial tones. Kuroda had long experience decide on all the necessary steps this time,” BOJ officials were shaken by the finan- influencing financial markets from his Kuroda told a news conference. Sporting cial industry’s criticism, acknowledging days leading Japan’s currency policy at the a red tie, he was animated, accenting his that the rush to get the plan out had left Finance Ministry, where he was regularly points with frequent smiles and hand ges- the market in the dark about the opera- ambushed by reporters for comment on tures. “We had that kind of discussion, and tional details of the $500 billion in annual possible yen-selling interventions. I was able to garner everyone’s support.” bond purchases. But there is no going back. Presented with carefully calibrated pro- But there wasn’t time to forge agree- “Basically, we’re coming up with the posals on how much the BOJ would need ment on everything. The bank failed to set specifics as we go along,” one senior central to boost money supply to achieve the de- a new measure to show it wasn’t simply bank official said. sired level of inflation, Kuroda asked his printing money to repay the national debt. staff to go big on the numbers. “Can we It could agree only to suspend the previous Additional reporting by Sumio Ito, Yoshifumi make it double for everything?” he asked. limit, which the new policies broke. And Takemoto and Stanley White; writing by By the time he faced the media to an- the policy board left operational details William Mallard, Editing by Bill Tarrant and nounce the policy, he had a simple chart undecided - to the consternation of the Michael Williams

SPECIAL REPORT 6 BANK OF JAPAN Kuroda’s calculus

Bank of Japan under new management The Bank of Japan unleashed the world’s He has also warned the government must most intense burst of monetary stimulus on play its role in beating deflation by pursuing April 4, promising to inject about $1.4 trillion structural reform and deregulations to make into the economy in less than two years. Japan an easier place to do business. Here are short profiles of the Bank of Japan’s board that took the decision: SAYURI SHIRAI, 50 – The former International Monetary Fund economist HARUHIKO KURODA, 68, GOVERNOR – often sided with ex-governor Masaaki He was plucked from the Asian Development Bank of Japan’s board members (from the left): Shirakawa, who argued the BOJ had already Bank by Prime Minister Shinzo Abe to deliver Takehiro Sato, new Deputy Governor Hiroshi offered enough stimulus. The board’s radical reflationary policies at the Bank of Nakaso and Koji Ishida. REUTERS/Yuriko Nakao only woman, while mostly voting with the Japan. Took office in March. Kuroda had long majority, surprised markets in March by criticised the BOJ for doing too little, too late proposing, shortly before Kuroda joined, to end deflation and boost the Japanese that the BOJ combine its two bond-buying economy. A voracious reader of books He has been willing to cut interest rates, schemes to make it easier to buy longer- ranging from philosophy to detective novels. proposing in December cutting the 0.1 dated debt – an idea the incoming governor percent floor on money-market rates. His was floating. The proposal was rejected KIKUO IWATA, 70, DEPUTY GOVERNOR proposal was rejected 8-1. 8-1 before being adopted at Kuroda’s first – He was among the most firmly established meeting in April. critics of the BOJ, arguing the central bank TAKEHIRO SATO, 51 – The former could have ended deflation sooner with more economist at Morgan Stanley MUFG TAKAHIDE KIUCHI, 49 – The former aggressive action. Took office in March. He Securities had argued for buying foreign Nomura Securities chief economist was one had advocated the BOJ target base money bonds as a future option for the BOJ. He of the two board members voting against – cash and deposits at the central bank – in backed down after the idea drew heat from raising the BOJ’s inflation target to 2 percent guiding policy. That was one of the steps the other G7 nations that consider it tantamount in January. He said this was far above a BOJ took on April 4. to currency intervention. Initially regarded as sustainable level for Japan, which has a policy dove, the amateur violinist was one seldom had inflation that high, even during HIROSHI NAKASO, 59, DEPUTY of two members who dissented to the BOJ’s asset bubbles. Kiuchi, despite earlier warning GOVERNOR – He was in charge of the January decision to double its inflation target against loading up on longer-dated debt, central bank’s international affairs before to 2 percent. joined the rest of the board in voting for most being named to Kuroda’s team in March. of Kuroda’s reflationary policies in April. With his fluent English and deep overseas RYUZO MIYAO, 48 – A soft-spoken But he proposed watering down the BOJ’s contacts, Nakaso played a key role in trying former academic known for his research commitment to hitting its inflation target in to contain the damage to global banks from on inflation-targeting, he is considered two years. His proposal was rejected 8-1. the collapse of Lehman Brothers in 2008. among the board’s keenest proponents of unorthodox easing. Miyao has proposed KOJI ISHIDA, 65 – The veteran banker several policy changes in the past, including FOR MORE INFORMATION voiced caution over shifting the BOJ’s policy boosting the BOJ’s asset-buying and loan Leika Kihara, Chief Correspondent, Policy framework too quickly, even as governor- scheme, but without garnering a consensus. [email protected] nominee Kuroda was advocating aggressive Bill Tarrant, Enterprise Editor action. Ishida feared that overloading the YOSHIHISA MORIMOTO, 68 – The former [email protected] bank’s balance sheet with long-term debt utility executive has always voted with the Michael Williams, Global Enterprise Editor could bind its hands on future decisions. majority since joining the board in 2010. [email protected]

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SPECIAL REPORT 7