Japanese stocks and the yen both rallied strongly yesterday after local news outlets reported that Haruhiko Kuroda is favoured to become the new central bank governor.
The 68-year-old economist is widely considered a safe pair of hands, particularly among the international financial community. Kuroda has been head of the Asian Development Bank since 2004 and has decades of experience at Japan’s finance ministry, where his last post was as an economic adviser to Junichiro Koizumi’s cabinet.
Masaaki Shirakawa, the current governor, is stepping down on March 19 after disagreements with Prime Minister Shinzo Abe over monetary policy. The new governor is expected to be announced this week.
Kuroda’s rivals for the post, Toshiro Muto and Kazumasa Iwata, are both former deputy governors. Muto is not a trained economist, but, like Kuroda, has a long history at the finance ministry. Iwata, on the other hand, is head of the Japan Centre for Economic Research and has spent most of his career as an academic.
All three candidates are broadly supportive of Abe’s policies, though Muto has been the most outspoken in calling for more aggressive action from the central bank. This criticism has played well in Japan, but Western bankers in Tokyo say they prefer Kuroda’s more sober, international outlook.
Whoever wins will be faced with the task of achieving the Bank of Japan’s new 2% inflation target — a key plank of the prime minister’s plans.
To some extent, the foundations have already been laid. Japan’s benchmark Nikkei 225 stock index has risen 34% since November, in anticipation of a looser monetary policy stance under Abe, who was elected in December — and the index gained almost 2.5% yesterday alone.
The yen has weakened by so much — close to 20% during the same period — that some foreign observers have even accused Abe’s administration of pursuing a “competitive devaluation”.
However, the G20 gave Abe a pass on that charge, and most of Japan’s exporters would probably agree.
“The pace of the depreciation has taken export businesses by surprise,” according to one investment banker in Tokyo. “Although we think of them as exporters, they also rely on imports for a lot of their raw materials and those costs are now sky-rocketing.”
Ironically, the exporters benefiting most in the short term are those that failed to adjust to the days of the strong yen and kept their production at home. Shares in Mazda, for example, are up more than 150% since November as the stay-at-home carmaker has profited from dwindling costs.
But the fear remains that Japan’s zealous pursuit of looser policy could lead it to consider foreign bond purchases, which would draw far stronger criticism from the international community.
Such considerations may play to Kuroda’s strengths. After years of arguing for greater economic cooperation at the ADB, he is unlikely to lead Japan into the international wilderness.
Indeed, before joining the ADB he wrote a paper on exchange rates that made his views clear: “Exchange rate issues are intrinsically international and so must be subject to strict international surveillance (I would refer you to Article IV of the IMF Charter), while fiscal and monetary policy is basically domestic, and should not be influenced too much by external pressure.”
This clearly suggests that Kuroda would be a strong defender of Abe’s monetary and fiscal policies, even amid foreign criticism. But it also shows a man who understands the meaning and importance of Japan’s international commitments.
Of course, Abe will need to do more than just flood the economy with money to fix the country’s problems, but growth, which is a cure for many ills, is the first priority. Much further down the line, the challenge for the new governor will be timing the shift to tighter policy.
That decision will undoubtedly come under intense pressure as the time nears and may demand a central banker with political wiles. Kuroda might have the economic credentials, but it remains to be seen if he can roll his sleeves up.
