After the “bazooka,” the Bank of Japan dismantles the work of its radical boss

TOKYO, Sept. 13 (Reuters) – After years of shock and fear, the Bank of Japan is quietly reversing the radical policies introduced by its bold leader Haruhiko Kuroda and pioneering new controversial measures blurring the lines between central banking and politics.

The development of Japan’s complex politics is driven by Deputy Governor Masayoshi Amamiya, according to insiders, a career central banker considered the main candidate to replace Governor Kuroda whose term ends in 2023.

Amamiya and his senior lieutenant Shinichi Uchida have worked behind the scenes to complicate Kuroda’s complicated political framework, the product of years of failed attempts to revive stagnant consumer prices, and eventually return Japan to a more normal setting. of interest rates, the economy struggles with the pandemic. Read more

The BOJ’s shrinking monetary options mean the two ambitious technocrats are pushing the bank toward schemes that border on industrial policy, such as those designed to encourage consolidation in the banking sector and green financing. Read more

The most decisive and recent change in policy direction, although not formally communicated, occurred at the March meeting of the BOJ when it announced that it would stop committing to a fixed program of risky asset purchases, barely visible sign that it was holding back its monetary support. Read more

“With the March move, the BOJ laid the groundwork for a possible normalization of policy,” said a close Kuroda collaborator with knowledge of the central bank’s political deliberations.

This account of the events surrounding the March meeting is based on interviews with more than two dozen central banks and former government and government officials, government and opposition legislators, and academics with direct or indirect knowledge of policy decisions. monetary. The BOJ declined to comment on the story and rejected a Reuters request for interviews with Amamiya and Uchida.

“The current stimulus cannot remain forever and must be reversed at some point,” said a former BOJ political official who was involved in the March decision. “That’s always on the minds of career central bankers.”

Officially, the change in March was aimed at extending the useful life of the stimulus policies advocated by Kuroda, the man who was once seen as a bold visionary who could shock the economy by deflation with his program of purchase of “bazooka” assets.

However, experts report that there was another reason: to pave the way for a possible withdrawal of these same policies.

While this intention was hidden in the markets, it would mark a symbolic end to Kuroda’s daring experiment based on the textbook theory that strong monetary action and communication can influence public price expectations and raise inflation. .

“It’s like the BOJ is trying to prove itself by doing something new all the time,” former BOJ Deputy Governor Hirohide Yamaguchi said. “What is clear is that the BOJ cannot affect and shape the public mindset like gelatin.”

Prime Minister Yoshihide Suga’s decision to resign this month could raise questions about the BOJ’s communication, ultra-loose politics and possible Kuroda successors for the next Japanese leader.

Seen as a symbol of decisive monetary easing, it seems that Kuroda is taking a back seat to the BOJ’s recent predictions that inflation will miss the bank’s 2% dodging target far beyond its term ending the 2023. read more

It has also recognized the need to address the ultra-low interest rate tensions of financial institutions.

Only half of his six speeches so far this year have been on monetary policy, in contrast to his first year as governor in 2013, when all 15 speeches minus both focused on monetary policy.

With his insistent defense of declining inflation by 2%, Kuroda writes a memoir on topics ranging from meetings with various overseas political leaders to the pizza he ate during a business trip to Naples, according to its associates. Read more

“He probably likes to read philosophy books rather than preside over board meetings,” he joked about the bookish governor.

DISABLE EGGS

Planning for a possible exit from the Kuroda-era stimulus remains closely maintained and has not been part of the bank’s official communication.

But there has been a gradual withdrawal since 2016, when the BOJ replaced the commitment to pump money at a certain rate with a policy that controlled interest rates.

An aficionado of classical music known as “Mr. BOJ” for drafting numerous monetary relief schemes, Amamiya since the beginning of last year has orchestrated a more concerted recovery of the same stimulus that helped create Kuroda. Read more

The details would be worked out by Uchida, who, like Amamiya, has been prepared to rise to the rank of the BOJ armed with “a wealth of ideas and an extremely sharp mind,” say people who have worked with him or under him.

The challenge was to mitigate the rising cost of prolonged relaxation for financial institutions, without giving the impression to the markets that the BOJ was heading for an abrupt easy exit from politics.

Amamiya approved a controversial scheme introduced in November, according to which the BOJ pays 0.1% interest on regional lenders that increase profits or consolidate.

It was a nod to regional banks ’complaints that the BOJ’s negative-rate policy reduced already thin margins and reflected concern among policymakers that chronic low rates could destabilize the banking sector.

“This is essentially a scheme to compensate regional banks for the negative interest rate blow,” a source said.

In mid-2020, bureaucrats were also debating ways to address what has been their biggest headache: the BOJ’s huge exchange-traded fund (ETF) holdings exposing its balance sheet to potential losses from the oscillations. Market relations.

For years, the government relied on the BOJ to set a minimum price for Japan’s stock market, discouraging central bankers from abandoning the commitment to buy ETFs at a certain rate.

But as stocks continued to rise, the political mood changed. Lawmakers began to complain about the distortion caused by BOJ’s large presence in the stock market.

Last year an opportunity arose: after accelerating buying to alleviate the market turmoil caused by the pandemic, the BOJ began to cut purchases and found markets that took the pace calmly.

This convinced BOJ officials that the bank could finish the purchase without lifting the markets, as long as it gave guarantees that it would still intervene in times of crisis.

“The BOJ made an absolutely right decision starting with a reduction in the ETF towards the exit of an easy policy,” said former opposition trade and heavyweight minister Banri Kaieda, who was an advocate. vocal of an aggressive monetary relaxation.

BLURED LINES

The next step would be to raise interest rates (the first rise since 2007) and eliminate excess cash from the market.

The March movement laid the groundwork for this step. But a rate hike could take years due to moderate inflation and will likely be left to Kuroda’s successor, sources say.

“If the BOJ is lucky, the debate (about raising rates) could begin around 2023,” former BOJ executive Eiji Maeda told Reuters.

“But this will not be the normalization of policies. It will simply be a step outside of an extraordinary stimulus towards more sustainable monetary relief,” said Maeda, who was involved in drafting the current stimulus.

The sale of the BOJ’s huge ETF stakes will be even tougher. While bureaucrats have come up with ideas internally, there is no consensus on when and how this could be done, sources say.

Of course, policymakers, both inside and outside the BOJ, say some sort of stimulus is still needed to support the struggling economy, and that it is unlikely to change when Suga resigns.

This would leave the central bank in a pattern of participation, even when its international counterparts stepped out of the stimulus in crisis mode and forced the BOJ to take unconventional initiatives outside the monetary toolbox to make a juice in the economy.

These include a scheme presented in July, which provides financial funding to banks that provide activities aimed at combating climate change. Read more

This plan becomes Suga’s commitment to turn Japan into a carbon neutral by 2050, a sign that the BOJ is controversially aligning its policy with government priorities.

This proposal is typical of Amamiya, who knows how the political wind blows and can flexibly adapt to changes in popular opinion, say people who have worked with him.

“We should avoid intervening in the allocation of assets as much as possible. But there is no simple and lasting line that can be based on what is acceptable or not,” Amamiya said in July.

“As economies become more sophisticated … the requirements of economic policy also become more complex and difficult.”

These forays into quasi-governmental politics highlight the BOJ’s current lack of conventional ammunition and lead it into politically unexplored waters.

Miyako Suda, a former BOJ board member, said many of the bank’s new programs leave him with less autonomy when it comes to removing the stimulus they have with conventional policy tools.

“It’s no longer a decision the BOJ can make on its own,” he said. “When the government and the BOJ work side by side in the same direction, things are going well: the problem is when both sides are heading.”

Reports by Leika Kihara; Additional reports by Tetsushi Kajimoto, Takaya Yamaguchi, Kaori Kaneko, Kentaro Sugiyama and Takahiko Wada; Edited by Sam Holmes

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