Dec 16, 2014

    Time for BOJ to take a back seat

    AS THE world watches to see what Prime Minister Shinzo Abe does with his renewed mandate in Japan, my eyes are on Haruhiko Kuroda instead.

    After all, the Bank of Japan (BOJ) governor probably deserves about 90 per cent of the credit for whatever success Mr Abe's reflation efforts have had thus far - in particular, a more than 70 per cent rise in the benchmark Topix index.

    Whether the Prime Minister now goes further and implements the real structural reforms Japan needs depends as much on Mr Kuroda as anyone else.

    Mr Abe's victory was not as sweeping as it might appear at first glance. Amid record-low turnout, his Liberal Democratic Party ended up with a couple fewer seats than previously, although still enough for the ruling coalition to maintain its two-thirds majority in the Lower House of Parliament. Not surprisingly, officials in Tokyo are talking less about politically difficult reforms and more about putting money in the hands of the Japanese to spend.

    Analysts are expecting a rush of new fiscal stimulus early in the new year. Mr Kuroda, too, will face pressure to one-up himself when the BOJ meets on Friday.

    Like addicts looking for their next fix, markets want the central bank governor to outdo his "shock and awe" from April last year and the recent Halloween surprise on Oct 31, when he boosted bond purchases to about US$700 billion (S$917 billion) annually.

    It's time for Mr Kuroda to do exactly the opposite: hold his fire and prod Mr Abe to begin doing his part to push through his "third arrow" of structural reforms.

    Till this point, Mr Kuroda has been a dutiful and circumspect policymaker - perhaps to a fault. Other than a brief flash of impatience with Mr Abe's foot-dragging in a May Wall Street Journal interview - when he said "implementation is key, and implementation should be swift" - Mr Kuroda has held his tongue.

    Yet he bears a responsibility to play the honest broker role that monetary powers have over the years - from Paul Volcker at the Federal Reserve decades ago to Raghuram Rajan at the Reserve Bank of India today.

    On Friday, Mr Kuroda should tell reporters: "Now that the election is over, it's up to Mr Abe to carry out the will of the people and deregulate the economy. For now, we at the BOJ have done all we can - and are willing to do - to make Abenomics a success." Stock traders would abhor such candour from a central bank that has spent the last 21 months refilling the punchbowl.

    But a smart economist and wise tactician like Mr Kuroda has to know that this Japanese experiment will end very badly if Mr Abe fails to encourage innovation, loosen labour markets, lower trade tariffs and cut red tape. If bond traders drive government bond yields higher and credit-rating companies pounce, the blame will fall squarely on Mr Kuroda.

    In a recent report titled The Year Of Living Dangerously, HSBC strategists David Bloom and Paul Mackel warn that if Mr Abe pressures the BOJ to do more, "it's entirely possible that the yen decline becomes disorderly and swift". They fear the apparent drift towards increased stimulus: "We do not expect a 'helicopter drop' of income in every household, but the yen would react very badly to any sign that the government is heading down a route of overt monetisation."

    The investment world views Mr Kuroda as a maverick - a man who's breaking all the rules in Tokyo. In reality, though, he has fallen into the same trap that ensnared Masaru Hayami, the BOJ leader from 1998 to 2003, who pioneered quantitative easing. Just as then, by assuming responsibility for re-energising growth, the BOJ is unintentionally becoming a crutch for politicians eager to seize any excuse to avoid challenging vested interests.

    Mr Kuroda's policies have indeed been bold - bolder than anything Mr Abe himself has been willing to attempt. But the BOJ's policies are allowing the government to sidestep its responsibility. That must stop if Abenomics is to come off life support.

    On Friday, Mr Kuroda should begin nudging Mr Abe to do something with his popular mandate for change. Anything.