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Quiet critic of BOJ's 'monetary shamanism' turns up the volume

Izuru Kato is a soft-spoken and bookish economist, but his dismissal of the Bank of Japan's stimulus policy as "monetary shamanism" is ringing loud in the ears of bank governor Haruhiko Kuroda - PHOTO: REUTERS

[TOKYO] Izuru Kato is a soft-spoken and bookish economist, but his dismissal of the Bank of Japan's stimulus policy as "monetary shamanism" is ringing loud in the ears of bank governor Haruhiko Kuroda.

Mr Kuroda's policy of quantitative and qualitative easing (QQE) - increasing the money the bank supplies to the financial system by buying high-quality assets - is aimed at lowering real interest rates, pushing up inflation and stimulating private demand to revive an economy that has stagnated for two decades.

Mr Kato says it relies too much on psychology, and academics and former policymakers are increasingly agreeing with him.

His weekly research notes - with witty insights stretching from monetary policy to how the poor lime crop in Mexico is inflating margarita prices - have become a must-read for investors and central bankers.

Years of experience as a money market broker at the receiving end of the BOJ's market operations has made Mr Kato, now economist and president of the Totan Research think-tank, a dab hand at interpreting the messages of BOJ policymakers.

He remembers - and was critical of - the bank's previous failed effort in quantitative easing (QE) in the five years to 2006.

The 49-year-old took an even dimmer view of QQE, though few were listening as sentiment picked up and Tokyo shares rose.

Now, as markets lose faith that QQE will achieve the BOJ's central policy plank that inflation will rise to 2 percent from early next year, he has the ear of many more.

The policy is flawed, he argues, because it fails to explain why inflation should rise when economic growth is subdued, and relies instead on people's belief that the stimulus will cause prices to rise enough to encourage them to spend now. "While other central bank governors use similar tactics, Kuroda is among the most extreme 'shaman' of them all," Mr Kato said in a recent interview. "But there are limits to how long you can keep affecting expectations. The transmission channel of QQE just isn't clear."


Advocates of QQE say Mr Kuroda's massive stimulus is reducing already low interest yields, which should lower expectations of future real borrowing costs and lift inflation expectations.

But Mr Kato's criticisms are resonating with those BOJ policymakers who always had some reservations about QQE. "He's spot on about a lot of things," said one central banker and a friend of Kato. "He's very knowledgeable about the technicalities of monetary policy, perhaps more than even some of us at the BOJ."

A majority on the board has already expressed doubts on the feasibility of setting a two-year timeframe for hitting the inflation goal or on the BOJ's optimistic economic outlook.

What sets Mr Kato apart from many QQE sceptics is his warnings on the dangers even if Kuroda hits the inflation target.

Three years into the introduction of QQE last April, consumer prices could rise more than 9 percent, which households would find hard to manage with wage growth still slow, he argues.

And higher inflation would push up long-term interest rates and raise the cost of financing Japan's huge public debt, he says, putting at risk premier Shinzo Abe's efforts to lift the economy out of stagnation.

Moreover, the BOJ's bloated balance sheet will exceed the size of Japan's economy in 2018 if the current pace of asset buying continues, which will make an exit from QQE extremely difficult, potentially triggering a bond market sell-off, he says in his recent book, titled "No way out for the BOJ". "What's worrying is that the current BOJ board does not seem to have the readiness to be well prepared for when they have to exit QQE," he said in the book.

In such circumstances, says Miyako Suda, an academic who served as a BOJ board member for a decade until 2011, the central bank might need to call on Mr Kato's services. "When you think about the time the BOJ were to end QQE, it would be nice to have someone well versed in market functions like him." REUTERS