One of the pleasures of an earlier phase of my life was to take tea periodically at the Bank of Japan (BoJ). There I would enjoy wide-ranging conversations about Japan’s political economy with senior Japanese central bankers for whom having tea with foreigners was about as radical as it got. Autres temps, autres moeurs. The new team that prime minister Shinzo Abe is putting in to run the Bank of Japan is arriving with a mandate to shake it out of its cautious and conservative ways as much as to impose the hyper-expansionary Abenomics intended to shake the country out of its deflationary malaise.
At the head of that team will be Haruhiko Kuroda, who will replace Masaaki Shirakawa as the bank’s governor when the later retires early in April. Kuroda is currently president of the Asian Development Bank, whence he has expounded strongly anti-deflationary views and promoted the notion of Japan having an inflation target.
He will be an outsider in another respect. He will be the first governor since the central bank got full independence in 1998 to come from the finance ministry (MoF). If that wasn’t a slap in the face enough for the central bankers (BoJ officials and those from the MoF have a fierce sense of rivalry), Kuroda came up on the ministry’s international side, most definitely the wrong side of the tracks for Japan’s status conscious senior bureaucrats.
In practice, Kuroda’s good English and international experience and connections, may matter more at this point. Japan is already the target of foreign criticism for the yen depreciation aspect of Abenomics.
At Kuroda’s side will be Kikuo Iwata, a professor of economics at Gakushuin University, one of Abe’s closest advisors and a long-time critic of the central bank. He will join another pro-inflationist, Hiroshi Nakaso, as a deputy governor. Nakoso is a career BoJ man but does not come from the bank’s prestigious monetary policy division. He is from its financial markets side. He, too, though, is known and respected in the tight world of international central bankers.
What this triumvirate has to do, though, is very domestic: end the deflation that has plagued the country for nigh on two decades and sustain the 2% inflation rate that Abe wants. To do that they will have to throw out the guiding principle of the Shirakawa years, that Japan’s deflation is a real economy, not a monetary problem and thus primarily requiring structural reform not easy money to solve it. But that is exactly what Abe has put his three reflationists in to do.
Abenomics is no more, at base, a conviction that deflation is a monetary problem. And expressing conviction in hyper-expansionary monetary policies being the answer is half the battle, and almost all of the expectations battle. The new triumvirate at the bank won’t be timid on that front. Yet, saying that the esteemed BoJ has got it wrong for years won’t be comfortable, especially inside the bank.
However, Shirakawa wasn’t wrong that Japan needs structural reform, even if that will now play second policy fiddle to monetary easing. The prime minister has to support his new central bankers by not flinching from the reforms that the country still needs, and which he has promised, if in the general rather than the specific. There is still much to be done in deregulating agriculture, healthcare and energy, though those are all industries where vested interests hold sway over his party.
Abe has hinted at joining the non U.S.-led TransPacific trade pact (TPP) which may give him leverage to open up the economy if he can deftly promote it within his party as a counterbalance to China’s growing influence. He is building up a surprising head of steam getting his economic reform agenda underway. We suspect there won’t be much time for tea.