BOJ chief sticks his neck out, pressures PM Abe for action
Jun 16 2014 , Tokyo
Kuroda, confident that the BOJ's massive monetary stimulus is pulling Japan out of two decades of growth-sapping deflation, is under no illusion that money-printing alone can underwrite a durable recovery.
A long-time critic of the BOJ's past cautious approach to policy making, Kuroda's bluntness has found a new target: Abe, who in 2013 hand-picked the Oxford-educated economist and former finance ministry mandarin to recharge the economy.
Specifically, Kuroda is pressing for reforms that the prime minister has promised in order to reverse the decline in prices which has crimped growth, profits, investment and consumption since the late 1990s, say sources familiar with his thinking.
He wants Abe to walk the talk.
Last month Kuroda strayed from central bank territory into the government's remit, telling a Tokyo audience that to revive Japan's "animal spirits", the government must fix problems like labour shortages that are growing acute as the economy recovers.
A week later Kuroda stressed that it was critical to have "efforts beyond the realm of a central bank, like those undertaken by the government and companies" to ensure growth in the medium to long term.
Analysts say Kuroda's unusual candour comes with risks.
"He can say these things now because the economy is on track," said Koichi Haji, chief economist at NLI Research Institute. "But there's always a risk it will backfire and put him under heat, particularly if inflation doesn't reach 2 percent."
The stakes are high. Abe's "growth strategy" is expected to be unveiled around June 27.
Analysts say Kuroda's comments were probably timed to influence discussions on the strategy, especially as supply constraints, including a shrinking workforce and weak productivity, have surfaced faster than the BOJ had anticipated.
If Abe's package fails to rev up Japan's paltry growth potential, the recovery may falter. Worse still, if financial markets lose faith that Tokyo will rein in the industrial world's heaviest public debt burden, interest rates could spike, wrecking the recovery and damaging the financial system.
FROM DEMAND TO SUPPLY
Japan's economy has gained speed over the past year thanks to the first two arrows of rapid monetary expansion and fiscal stimulus, with inflation reaching the half-way mark of the BOJ's goal of achieving 2 percent inflation next year.
The BOJ chief does not think his mission is accomplished yet, but people familiar with his thinking say he is already focusing on what happens after he hits his price goal.
There is no guarantee of success, but Kuroda's push for the government to deregulate the economy may have come at an opportune time. Even some easy-money advocates close to Abe say the economy now needs reform more than stimulus.
"As things stand now, only prices are rising while the growth rate isn't rising," said a person close to the finance ministry.
"So we're heading into a situation nobody wants, where wages don't rise - only prices do. It's natural for Mr Kuroda to stress the importance of the supply side."
In Kuroda's Tokyo speech last month, he listed some economic challenges: enhancing productivity, bringing more women and elderly into the workforce, employing highly skilled foreigners and putting public finances on a sustainable footing.
These are precisely the kinds of policies Abe has promised to tackle with his 'third arrow' of reforms. On Friday, he unveiled a plan to cut the corporate tax rate below 30 percent, in stages, to spur growth.
Yet, outlines of the "third arrow" policies and drafts seen by Reuters offer only broad goals with few specifics. Previous reform proposals have disappointed investors as vague and ineffective.
Kuroda kept up the pressure, telling a news conference on Friday that the government has work to do. "The central bank ought to achieve price stability and the government a domestic demand-driven growth," he said.
The issue assumes an urgency for the central bank chief as the ageing workforce shrinks and productivity ebbs.
"Simply ending deflation won't guarantee Japan will return to the days of strong economic growth," said Hideo Hayakawa, a former top BOJ economist who still commands attention in the central bank for his analysis.
He said that if Abe doesn't carry through with reforms, Japan risks falling into stagflation.
The BOJ reckons Japan's potential economic growth rate is less than 0.5 percent. The bank and government policy makers want to raise that rate above 1 percent, though it would still lag well behind the 4 percent rates Japan clocked in the 1980s.
STICKING HIS NECK OUT
With public debt worth more than twice the size of the economy, Kuroda worries that the bond market may finally face a reckoning for decades of profligate spending, say the people familiar with his thinking.
Abe's government can now borrow 10-year money at just 0.6 percent - thanks largely to the BOJ's policy of buying most new government bonds on offer - but market confidence is fragile.
A mere 1 percentage-point rise in interest rates would boost Japan's debt-financing costs by 1.8 trillion yen ($18 billion) a year, nearly quadruple the rise in tax revenues expected from stronger economic growth, reckons Toshiki Tomita, an academic member of the Finance Ministry's advisory panel.
For his part, Abe does not appear to be piling pressure on Kuroda to do more by way of near-term stimulus, given the bank's policy is "on track" and the job market is tightening faster than expected, according to Kozo Yamamoto, a prominent reflationist adviser to Abe in the premier's ruling party.
Whether Kuroda's arguments gain any traction with Abe is another question. He has stuck his neck out. He is careful to say the BOJ will ease further if the economy falters and his inflation target is in jeopardy, but he has staked out a position that could prove hard to retreat from.