Bank of Japan dismantles work of radical leader after ‘bazooka’

TOKYO, Sept. 13 (Reuters) – After years of stimulation by shock and fear, the Bank of Japan is quietly reversing sweeping policies introduced by its bold leader Haruhiko Kuroda and launching controversial new measures that blur the lines between central bank and Politics.

Japan’s complex political unfolding is being led by Deputy Governor Masayoshi Amamiya, according to insiders, a career central banker seen as the top candidate to replace Governor Kuroda whose term ends in 2023.

Amamiya and her top lieutenant Shinichi Uchida worked behind the scenes to make Kuroda’s complicated political framework – a product of years of unsuccessful attempts to revive stagnant consumer prices – more manageable, and ultimately bring Japan back to low rates. more normal interests, even as the economy grapples with the pandemic. Read more

The decline in the BOJ’s monetary options means the two ambitious technocrats are instead pushing the bank into projects close to industrial policy, such as those designed to encourage banking sector consolidation and green finance. Read more

The most decisive and recent shift in focus, though not officially communicated, came at the BOJ’s March meeting, when it announced that it would no longer embark on a fixed agenda of purchases of risky assets, a discreet sign that it was slowing down its monetary support. Read more

“With the March decision, the BOJ laid the groundwork for a possible normalization of policy,” said a close Kuroda aide familiar with the central bank’s policy deliberations.

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

“The current stimulus cannot last forever and must be canceled at some point,” said a former BOJ decision maker who was involved in the March decision. “It’s always on the minds of career central bankers.”

Officially, the March change was aimed at extending the lifespan of stimulus policies championed by Kuroda, the man once seen as a daring visionary who could pull the economy out of deflation with his “bazooka” asset purchase program. “.

However, insiders say there was another motive: to pave the way for an eventual withdrawal from those same policies.

While this intention was hidden from the markets, it would mark the symbolic end of Kuroda’s daring experiment based on the textbook theory that forceful monetary action and communication can influence public price expectations and push upward. inflation.

“It’s like the BOJ is trying to prove itself by doing something new all the time,” former BOJ vice-governor Hirohide Yamaguchi said. “What has become clear is that the BOJ cannot affect and mold the public mindset like jelly.”

Prime Minister Yoshihide Suga’s decision to step down this month could raise questions about the BOJ’s communication, ultra-cowardly politics and Kuroda’s possible successor to the next Japanese leader.

Once seen as the symbol of decisive monetary easing, Kuroda appears to be taking a back seat to recent BOJ forecasts that forecast inflation will miss the bank’s elusive 2% target well beyond its tenure. ending in 2023. read more

He also recognized the need to tackle the strains that ultra-low interest rates have on financial institutions.

Only half of his six speeches so far this year have been on monetary policy, unlike his first year as governor in 2013, when all but two of his 15 speeches focused on monetary policy.

With his emphatic plea for a 2% drop in inflation, Kuroda writes a memoir on topics ranging from meetings with various foreign policy makers to the pizza he ate on a business trip to Naples, according to his associates. Read more

“He probably enjoys reading philosophy books more than chairing board meetings,” one joked of the bookish governor.

SCRUB THE EGGS

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

But a gradual pullback has been underway since 2016, when the BOJ replaced a promise to pump money at a determined rate with a policy of controlling interest rates.

A classical music fan known as “Mr. BOJ” for devising numerous plans for monetary easing, Amamiya has since early last year orchestrated a more concerted pullback from the very stimulus he helped Kuroda to. to create. Read more

The details would be worked out by Uchida, who, like Amamiya, was trained to move up the BOJ ranks, armed with “a wealth of ideas and an extremely keen mind,” say people who have worked with or under. him.

The challenge was to mitigate the growing cost of prolonged easing to financial institutions, without giving markets the impression that the BOJ was heading for a sharp exit from the ease policy.

Amamiya has given the green light to a controversial program unveiled in November, under which the BOJ pays 0.1% interest to regional lenders that increase profits or consolidate.

It was a nod to complaints from regional banks. The BOJ’s negative interest rate policy squeezed already slim margins and reflected the concern of policymakers that chronically low rates could destabilize the banking sector.

“This is essentially a program to compensate regional banks for the blow of negative rates,” said a source.

In mid-2020, bureaucrats were also debating ways to solve what has been their biggest headache: the BOJ’s huge holdings of exchange-traded funds (ETFs) that exposed its balance sheet to potential losses from fluctuations. of the market.

For years, the government has relied on the BOJ to set a floor price for the Japanese stock market, discouraging central bankers from abandoning their promise to buy ETFs at a fixed rate.

But as stocks continued to climb, the political mood changed. Lawmakers began to complain about the distortion that the BOJ’s huge presence was causing in the stock market.

Last year, an opportunity presented itself: after stepping up its purchasing to alleviate the market turmoil caused by the pandemic, the BOJ began to cut back on purchasing and found markets shrinking in the process.

This convinced BOJ officials that the bank could end its purchases without upsetting the markets, as long as it gave assurances that it would continue to intervene in times of crisis.

“The BOJ made a very fair decision by starting with a cut in the ETF and moving towards an exit from the policy of ease,” said former trade minister and opposition heavyweight Banri Kaieda , who was once a strong supporter of aggressive monetary easing.

BLURRED LINES

The next step would be to raise interest rates – the first hike since 2007 – and mop up excess market liquidity.

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

“If the BOJ is lucky, the debate (over the rate hike) could start around 2023,” former BOJ executive Eiji Maeda told Reuters.

“But it will not be political normalization. It will simply be a shift from extraordinary stimulus to more lasting monetary easing,” said Maeda, who was involved in drafting the current stimulus.

Selling the BOJ’s huge ETF holdings will be even more difficult. While bureaucrats have been brainstorming ideas internally, there is no consensus on when and how it could be done, sources say.

True, policymakers both inside and outside the BOJ say some form of stimulus is still needed to support the struggling economy, and that is unlikely to change when Suga steps down.

This would leave the central bank in a wait-and-see situation, even as its global peers consider exiting the crisis-mode stimulus, and force the BOJ to use unconventional initiatives outside the monetary toolbox to boost the market. economy.

These include a program unveiled in July, which offers cheap funds to banks that lend to activities aimed at tackling climate change. Read more

The plan is in line with Suga’s commitment to make Japan carbon neutral by 2050, a sign that the BOJ is controversially aligning its policy with government priorities.

Such a proposal is typical of Amamiya, who knows which way the political wind is blowing and can flexibly adapt to changes in opinion, say people who have worked with him.

“We need to avoid as much as possible intervening in asset allocation. But there is no simple and eternal line on which to draw what is acceptable and what is not,” Amamiya said in July.

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

Such forays into quasi-government politics highlight the BOJ’s current lack of conventional political ammunition and take it into politically uncharted waters.

Miyako Suda, a former BOJ board member, said many of the bank’s new programs left him less autonomy over when to withdraw stimulus measures than with conventional policy tools.

“It is no longer a decision that the BOJ alone can make,” she said. “When the government and the BOJ work side by side in the same direction, things turn out well – the problem is when the two go their separate ways.”

Reporting by Leika Kihara; Additional reporting by Tetsushi Kajimoto, Takaya Yamaguchi, Kaori Kaneko, Kentaro Sugiyama and Takahiko Wada; Editing by Sam Holmes

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