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Kuroda's Calculus: How the Bank of Japan Staged Its Big Bang

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Kuroda's Calculus: How the Bank of Japan Staged Its Big Bang BANK OF JAPAN Central bank chief Haruhiko Kuroda wanted unanimous support from his board for a radical monetary plan to pull Japan out of the economic doldrums Kuroda’s calculus: How the Bank of Japan staged its big bang BAY LEIK KIHARA Tokyo, APRIL 30, 2013 DEFLATIONARY DARK DAYS: Japan’s new central bank 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 deflation, 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 money. 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. Federal Reserve’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 money supply 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 80 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 banks on policy impact Source: Thomson Reuters Ministry of Finance 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 The BOJ’s monetary base target as exchange-traded funds and real-estate 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, Masaaki Shirakawa. 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, monetary policy,” 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.
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