A tumultuous Kuroda era reverberated way beyond Japan

HARUHIKO Kuroda changed Japan in crucial ways during his decade atop the country’s central bank. His successor will find it hard to undo the legacy, assuming he even wants to. Kuroda was a revolutionary in the cause of reflating an economy that once was lauded for possessing a secret sauce to, briefly, challenge the US for financial supremacy. Some of his innovations have stored up trouble for the future – and probably not just in Japan.

To truly appreciate the impact of Kuroda’s tenure, we need to travel back to late 2012 and early 2013. Shinzo Abe had just led the long-time ruling party back to government after three years in the wilderness. He sought a major shake-up: monetary, fiscal and regulatory. The first of those arrows was vital to fending off deflation, and in Kuroda, he found his man. Predictions that the avuncular, lifelong bureaucrat would champion a gradual evolution in policy were wrong. (I was sceptical myself that his leadership would be quite so eventful.) Kuroda’s two tumultuous five-year terms are in their final days, and a valedictory press conference has been pencilled for Friday (Apr 7). The fear of falling prices has been greatly diminished. Inflation, after a long absence, is a hotter topic. Not all of this about-face was Kuroda’s doing; he had a powerful assist from forces beyond Japan. But he never stopped trying new ways to lift inflation towards, and beyond, the 2 per cent target that Abe wrestled the Bank of Japan (BOJ) into accepting.

Viewed from afar, the Kuroda period was one big exercise in easing after years of moderate-but-consistent stimulus. Japan was an early mover on zero interest rates and bond buying before Kuroda came along. But he turbo-charged that approach, vastly increasing the BOJ’s balance sheet at his earliest opportunity before adding his own iterations. In 2016, the bank took rates negative and, months later, launched yield-curve control (YCC), which aimed to constrain long-term market borrowing costs. Submerging the benchmark rate was a daring move: The vote on the BOJ’s nine-member panel was 5-4. One defection would have killed the idea, and wounded Kuroda’s authority, perhaps irreparably. It was his most contentious step, prompting an outcry from banks and gyrations in global markets. As dramatic as those steps were, the BOJ went further: When they unveiled YCC, officials declared they wouldn’t be satisfied with inflation just getting to 2 per cent. Easing would continue until price gains exceeded the goal and stayed there “in a stable manner”. In other words, aim high, and you just might land in the right vicinity.

While the Federal Reserve, European Central Bank and others had used forward guidance to convey that rates would remain low for a while, enshrining an explicit intent to overshoot – a commitment to keep rates ultra low even if inflation goes above target – was rare. Like YCC, this radicalism was born of circumstance. There was no sign that negative rates, a shock development in January that year, inspired confidence. If anything, it had done the opposite. More surprises were necessary. Putting a ceiling on long-term bond yields didn’t really catch on globally. Australia deployed a similar programme during the pandemic and found the exit chaotic. Overshoot did get a more widespread following and a number of central banks, including the Federal Reserve and the European Central Bank (ECB), later adopted their own versions of the concept. At the time, however, the pledge was something doves fantasised about. Looking back, the importance of the overshoot was obscured at the time because inflation was so below target. It was considered almost theoretical.

It’s easy to see the seeds of the past year’s inflation surge in the overshoot proposition, but one needs to recall the pressures of the time. What were the preoccupations of first Kuroda, then Jerome Powell and the ECB’s Christine Lagarde? People had warned of runaway inflation and debased currencies ever since quantitative easing came along, and prices remained subdued. Remember Janet Yellen, who preceded Powell as Fed chief, calling inflation’s quiescence “a mystery” in 2017? Kuroda warned of deflationary mindsets taking hold among companies and consumers.

Kazuo Ueda, the next BOJ governor, will need to tread carefully. In his confirmation hearings, Ueda didn’t sound like a person in a hurry to walk back his predecessor’s handiwork. He will probably traffic less in surprises than Kuroda, though the substance is unlikely to differ markedly. The BOJ doesn’t believe current levels of inflation, the highest in decades, will last. Towards the end of last year, traders bet on Japan joining the rate-hike club. That hasn’t materialised, though the bank did allow long-term market rates to rise a little in December. Moreover, with many central banks nearing the end of their hiking campaigns or, at the very least, approaching a rest stop, the world may be inching towards Japan’s stance. Doing little will again be in fashion. Prolonged accumulation of government debt under quantitative easing is opportune, given the huge financing needs of the state. Japan has the developed world’s heaviest debt pile. The budget is labouring under the social security costs of an ageing population and plans for a substantial increase in defence spending. While the BOJ makes clear the bond buying is conducted for monetary – not fiscal – purposes, the purchases are nevertheless useful.

Was Kuroda a friend to yen weakness? Abe certainly made clear his preference for a soft exchange rate. Kuroda mostly professed agnosticism about swings, citing institutional arrangements that made the buying and selling of currencies a matter for the Ministry of Finance. His stated concern was the inflation target: Did something help or hurt its attainment? Yet the governor often gave the distinct impression he was fairly relaxed about yen declines. The currency did depreciate markedly on his watch, from less than 100 yen per US dollar when Kuroda took the reins to about 132 on Wednesday.

Kuroda’s BOJ fought on a number of fronts. It was exhausting at times. Behind it all was a mission to blast Japan out of a pronounced funk. It may not regain the swagger that characterised the late 1980s and early 1990s, when books on the Japanese way cluttered airport bookshops. Nobody can say Kuroda didn’t try. The effort was the point. We’ll need to learn to dance with Ueda now. The playlist will be Kuroda’s. BLOOMBERG