After ‘Bazuka’, Bank of Japan demolishes the work of its radical chief

TOKYO, Sept 13 (Reuters) – After years of shocking and frightening stimulus, the Bank of Japan is quietly reversing radical policies introduced by its courageous chief Haruhiko Kuroda and taking controversial new measures blurring the line between central banking and politics.

Japan’s sophisticated policy has been driven by apathy by Deputy Governor Masayoshi Amamiya, insiders say.

TOKYO, Sept 13 (Reuters) – After years of shocking and frightening stimulus, the Bank of Japan is quietly reversing radical policies introduced by its courageous chief Haruhiko Kuroda and taking controversial new measures blurring the line between central banking and politics.

Japan’s sophisticated policy has been driven by apathy by Deputy Governor Masayoshi Amamiya, insiders say.

Amamiya and his chief, Lieutenant Shinichi Uchida, have worked behind the scenes to create a complex strategic framework for Kuroda उत्पादन the product of years of failed efforts to revive stable consumer prices अधिक more self-sufficient, and ultimately bring Japan back to more normal interest rate settings.

BOJ’s dwindling financial options mean two ambitious technologists are putting pressure on banks that are on the edge of industrial policy rather than banks, such as those designed to consolidate the banking sector and promote green finance.

The most decisive and latest swing towards policy, though not formally communicated, came at the BOJ’s March meeting when it announced that it would no longer commit to a fixed program of risky property purchases, a clear sign that its financial support is declining.

“With the March move, the BOJ laid the foundation for the final policy normalization,” said a source close to Kuroda, referring to the central bank’s policy deliberations.

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

“The current impetus cannot remain permanent and must be brought back sometime,” said former BOJ strategists involved in the March decision. “It’s always been in the minds of career central bankers.”

Officially, the change in March was aimed at prolonging the life of stimulus policies backed by Kuroda, who was once seen as a bold visionary who could push the economy through his “bazuka” asset-buying program.

However, insiders say there was another purpose: to pave the way for a final withdrawal from these policies.

Although this intention is hidden from the markets, it will be a symbolic end to Kuroda’s daring experiment based on the textbook theory that tremendous economic action and communication can affect public price expectations and increase inflation.

“It’s as if BOJ is constantly trying to prove itself by doing something new,” said Hirohide Yamaguchi, a former deputy governor of BOJ. “It’s clear that BOJ can’t affect and mold the public psyche like jelly.”

Prime Minister Yoshihide Suga’s decision to resign this month could be a matter of debate for BOJ dialogue, over-slow policy and Kuroda’s final successor for Japan’s next chief.

Once seen as a symbol of decisive economic easing, Kuroda appears to be sitting in the back seat, according to recent BOJ estimates, predicting that inflation will miss the bank’s 2% target by the end of 2023. Read more

He acknowledged the need to focus on low interest rates on financial institutions.

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

Due to his statement about 2% inflation reduction, Kuroda is writing a memoir on topics ranging from meetings with various foreign policymakers to pizza eaten during business trips to Naples.

“Perhaps he enjoys reading books on philosophy more than chairing board meetings,” he joked with the booking governor.

Egg sticking

Plans for a final exit from the Kuroda-era stimuli have been kept close and are no longer part of the bank’s official communications.

But there has been a gradual setback since 2016, when the BOJ replaced its pledge to pump money at a fixed pace with a policy of controlling interest rates.

A fan of classical music known as “Mr. BOJ,” Amamiya has been organizing more integrated rollbacks of the stimulus he helped create Kuroda since the beginning of last year, to draft numerous financially accessible schemes. Read on

The details will be created by Uchida, who, like Amamiya, is designed to go up in the armed BOJ category with a “wealth of thoughts and an extremely sharp mind”, people say, who have worked with him or below him.

The challenge for financial institutions was to reduce the rising cost of long-term facilitation, without the markets realizing that the BOJ was heading for a sharp exit from the facilitation policy.

Amamiya approved the controversial scheme, unveiled in November, under which the BOJ pays 0.1% interest to regional lenders who increase or consolidate profits.

Complaints from regional banks were positive, BOJ’s negative rate policy was already lowering thin margins and there was concern among policymakers that long-term low rates could destabilize the banking sector.

“It is mainly planned to compensate the regional banks for the losses caused by the negative rates,” a source said.

By mid-2020, bureaucrats were discussing ways to address their biggest headache: the large holdings of BOJ’s Exchange-Traded Funds (ETFs) that exposed potential losses due to changes in its balance sheet market.

Over the years, the government relied on the BOJ to determine Japan’s stock market price, discouraging central bankers from abandoning their promise to buy ETFs at a fixed rate.

But as stocks grew, so did the political mood. The huge presence of BOJs caused lawmakers to start complaining about the distortions being created in the stock market.

Last year, an opportunity arose: after increasing purchases to reduce market turmoil due to the epidemic, BOJ began to withdraw purchases and the market appeared to be growing.

This convinced BOJ officials that the bank could stop buying without causing a stir in the market, as long as it assured that it would still intervene in times of crisis.

“The BOJ made the right decision, starting with the ETF taper towards moving out of an easy policy,” said former trade minister and anti-heavyweight Bannery Qaida, who was once a vocal supporter of aggressive economic facilitation.

Blurred lines

The next step is to raise interest rates – the first increase since 2007 – and to collect excess cash from the market.

The march movement laid the foundation of that step. But the rate hike could take several years due to declining inflation and is likely to be left to Kuroda’s successor, sources said.

“If BOJ is lucky, discussions could start around 2023 (on raising rates),” former BOJ executive EG Maida told Reuters.

“But this policy will not generalize. It will only move away from an extraordinary stimulus towards more sustainable economic facilitation,” said Maida, who joined the current stimulus draft.

It will be even more difficult to sell BOJ’s huge ETF holdings. While there is an idea of ​​internal thinking among bureaucrats, there is no consensus on when and how this can be done, sources said.

Certainly, policymakers both inside and outside the BOJ say some kind of stimulus is still needed to support a struggling economy, and that is unlikely to change when Suga steps in.

This will leave the central bank in a holding pattern, although the eyes of its global peers have shifted out of crisis-mode stimulus and forced the BOJ to use unconventional ventures outside the monetary toolbox to interest the economy.

That includes a plan unveiled in July, which provides cheaper funding to banks lending to ventures aimed at combating climate change. Read on

The plan is in line with Suga’s pledge to make Japan carbon-neutral by 2050, with the BOJ arguably aligning its policy with government priorities.

Such a proposal is typical for Amamiya, who knows which direction the political wind is blowing and can be flexibly adapted to change popular opinion, say people who have worked with him.

“We should avoid interfering in the distribution of assets as much as possible. But you can’t draw any simple, permanent lines on what is acceptable or invalid,” Amamiya said in July.

“As the economy becomes more sophisticated … the need for economic policy becomes more complex and difficult.”

Such boldness in quasi-government policy sheds light on the current shortage of ammunition in the BOJ’s traditional policy and leads to politically unknown waters.

Miyako Suda, a former member of the BOJ board, said many of the bank’s new programs leave less autonomy on when to draw stimuli than traditional policy tools.

“BOJ can no longer make decisions alone,” she said. “When the government and the BOJ are working in the same direction, things get better – the problem is when the two parts are on the way.”