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2019年3月

"Kurodanomics" : It's Progress and Evaluation

Ⅰ.   Introduction

  “Kurodanomics” implies the monetary policy which Mr. Haruhiko Kuroda, chairman of the board of Bank of Japan, has earnestly pursued since April 2013 soon after he took the office in March. Although Kurodanomics is not as commonly used expression as “Abenomics,” which means the package of economic policies of the administration led by prime minister Shinzo Abe, let me use this expression to represent the package of financial policies led by Mr. Haruhiko Kuroda for 6 years since spring of 2013.

   The principal aim of Kurodanomics has been to get Japanese economy out of the prolonged deflation, and attain the pace of stable 2 percent annual inflation. Since financial policy is crucial economic policy managed by the central bank of the country side by side with the government’s fiscal policy. The series of policies conducted by the leadership of Mr.Haruhiko Kuroda for the last 6 years have been unique and critical to determine the performance of Japanese economy for the period, I picked this topic with special interest.

  In this essay, I would like to review the basic objectives of Kurodanomics, its process of implementing critical policies and evaluate its performance. I will also discuss challenges of Kurodanomics for years to come.


Ⅱ.  Why “Kurodanomics?” economic and political contexts

   Mr.Haruhiko Kuroda was appointed as chairperson of Bank of Japan in March 2013 following his predecessor Mr. Masaaki Shirakawa. Mr.Kuroda has been appointed by Abe administration at the time when Japanese economy has been viewed as trapped in a prolonged deflation and economic stagnation.

   In spring 2013, Mr.Yoshihide Suga, Minister of Cabinet of Abe administration, kindly showed up in the special seminar of Shimada Juku to give a talk to the members. He said that the principal target of Abe administration was to overcome this prolonged deflation. He criticized the previous administrations saying that they have been relying on bureaucrats of ministry of finance on financial policies, and on BoJ experts when it comes to financial policies, and its consequence has been prolonged deflation and stagnation of the economy. He emphasized that Abe administration would take the initiative of economic policy by themselves, namely political leaders supported by experts.

   It is known that in preparing for competing to take prime ministers office, Mr.Shinzo Abe organized a small strategic study group of politicians and experts to formulate basic policy of Abe administration much ahead of the election of president of Liberal Democratic Party which was in September 2012. To the meeting of this study group, Mr. Haruhiko Kuroda, the then chairperson of Asian Development Bank, has participated frequently flying  often from Manila.

   When Mr. Kuroda was nominated as candidate for chairperson of BoJ, he testified in the Diet session of the House of Councilors saying that the fact that Japanese economy has been suffering from the deep deflation as long as 15 years since the 1990s must mean that BoJ did not conduct its responsible policy to overcome the problem. Incidentally, from 2008 to 2013, the period when BoJ has been chaired by Mr.Shirakawa, CPI(excluding fresh foods) declined by 1.4% and real GDP shrank by 1.2%. He obviously meant to take a leadership to overcome this serious issue of prolonged deflation and stagnation of Japanese economy as chairperson of Bank of Japan.


Ⅲ.  An extra-ordinary dimensional monetary easing

  Mr. Haruhiko Kuroda made a widely publicized declaration of his major policy in April 2013, which he himself termed “extra-ordinary dimensional monetary easing. He appealed to the press using the magic number of 2, i.e. attaining 2 percent inflation within 2 years. For that purpose, BoJ will increase the supply of base money by 2 times. His message was so clear and straightforward and also unprecedented in the sense that chairperson of the central bank commits the target of his major policy with quantity and time limit, it was broadly publicized across the world.

   In the community of financial experts, this policy is phrased as “QQE, “ namely, quantitative and qualitative monetary easing. The concept of “qualitative” easing is added in this policy since BoJ takes into account of the mix of financial commodities in addition to the total quality in order to carefully manage the effect of easing by adjusting the mix of heterogeneous financial commodities such as ETF.

   To be specific, his declaration of the policy has 3 major commitments:
(1) To attain the stable pace of inflation of 2 percent per annum within the time horizon of 2 years, hopefully, as early as possible. In fact, this target is included in the Accord between the Government led by prime minister Shinzo Abe and Bank of Japan led by chairperson Mr.Masaaki Shirakawa signed in January 2013.
(2) To achieve this target, BoJ will double the stock of base money and also double the stock of long-term Japanese government bond(JGB) and ETF(exchange traded fund) within 2 years.
(3)  Prolong the average remaining period of long term JGB by twice.

  The basic aim of this policy of QQE was to change the mindset of Japanese people from deflationary to inflationary. Since Japan has been sunk in the depth of deflation for nearly two decades, people have been used to deflationary economy where prices gradually fall or at least to not increase. Under such pattern of expectation, people tend to wait until prices fall before purchasing, and investors hesitate to invest because returns are expected to decline. This is a serious symptom of prolonged deflation which may well shrink the economy as time passes.

   What Abe administration aimed at was to get rid of this deflationary mindset of people, and instead, drive people to have inflationary mindset. Under inflationary mindset, people tend to buy things as soon as possible to enjoy merit of relatively cheap price, and investors tend to invest early in order to recoup large gains in the inflationary future. Whether such change of mindset will take place is the critical strategic intent of “Abenomics” and more specifically “Kurodanomics.”
 
   This declaration of QQE appealed strongly to financial experts in the world. Major investors and speculators rushed to bet on the declared increase of money supply, and sold huge amount of futures of exchanges at the current price, and only a few months later obtained huge gains. They also bought massive amount of shares of Japanese corporations, particularly of export industries, expecting that reduced exchange rate of the yen realized by expected massive increase of money supply will increase exports of such corporations and hence jerks up prices of their shares.

   Speculations and investments based on such expectations hit the top of the nail. Exchange rate fell rapidly as much as 20 percent in a few months, and share prices started to increase. Forerunning speculators and investors must have obtained large gains. Many others including Japanese investors followed. As a result, share prices of Tokyo Stock Market increased as much as 80% half a year later. This rapid increase of share prices and corporate profits seem to have given an optimistic momentum for Japanese economy.

    However, this momentum did not quite lead to increases of wages, and not to increase of prices. Since wages did not rise, people were not encouraged to spend, and stagnant movement of prices did not meet the strategic intent of the government and Bank of Japan to change the mindset of people from deflationary to inflationary.

   On the top of such stagnant behavior of wages and prices, the increase of consumption tax rate from 5% to 8% which was executed in April 2014 gave a profound shock to the government because after the increase of the tax rate, consumption dropped sharply. In fact, consumption increased markedly prior to the tax hike in the first quarter of 2014 as much as 4.9% of GDP per annum, but dropped dramatically as much as 7.1% of GDP in the following quarter in the wake of the increase of the tax rate. Ever since, the consumption has been stagnant until now which has dragged the performance of Japanese economy. This drastic drop of consumption in the wake of tax rise appears to have remained as a serious trauma for Abe administration making its tax hike policy reluctant.

   The boom siphoned by Kuroda QQE in 2013 was short lived although it still remains somewhat in share prices and corporate profits so that the strategic intent of altering mindset from deflationary to inflationary seems to be getting increasingly difficult to be satisfied. In this sense, the evaluation of 2013 QQE is mixed. It was successful in increasing share prices and corporate profits but failed to achieve its strategic intent of fostering inflationary mindset.


Ⅳ.   The second “Bazooka” and its meaning and effects

 Economic conditions have become more adverse for forging inflation in 2014 since consumption has not recovered from the sharp decline in the wake of the increase of consumption tax rate in April, economic growth has been sluggish. And above all, the sharp decline of oil prices since summer 2014 suppressed general trend of prices.

   At the policy committee of BoJ held on October 31, 2014, a surprising decision was disclosed. BoJ announced that drastic measures to fortify monetary easing to be executed as massive increases of purchase of JGB and relevant investment funds implying strengthening monetary easing measures both in terms of quantity and quality, featured mainly by an increase of purchase of JGB by 30 trillion yen annually and also increase the
purchase of investment trust 3 times. This package is nicknamed as “Second Bazooka, “ which is symbolized by the magic number of “3.”

  To be specific, the announcement included:
   ーIn terms of quantity:
     ・Increase the supply of base money by approximately 30 trillion yen to reach the
        annual pace of 80 trillion yen,
     ・This is done mainly by an increase of purchase of long term JGB by 30 trillion yen
         to reach the level of 80 trillion yen per annum.

   ーIn terms of quality:
  ・Extend the remaining period of JGB up to 7 to 10 years
      ・Purchase of ETF(Exchange traded fund) by the pace of 1 trillion yen to reach
         3 trillion yen.
      ・Purchase of REIT(real estate investment trust) 3 times more to reach 90 billion yen a year.

    It was reported later that there has been a harsh debate within the policy committee of BoJ between pros and cons about this decision. Those who propose this choice argued that the supply of a sizable additional base money is needed to show a strong will of BoJ to overcome deflation, while those who criticize argued that the impact of supply of additional base money is limited and such a massive supply may be interpreted as de fact BoJ’s fiscal
finance, which is prohibited by the fiscal law. After 4 hours of harsh debate, the decision was made by voting at the policy committee with 5(including the governor) who supported and 4 who opposed.

   The announcement of BoJ to add a major supply of base money had a positive surprising effect to the international financial market. This had a positive effect particularly the its timing was shortly after the FRB’s statement of ceasing the massive monetary easing which has been repeated three times until then. Share prices of stock exchanges of NY and other places in addition to Tokyo have risen markedly indicating welcoming response of international financial market to this surprise move of BoJ. However, this positive response has been only short lived.


Ⅴ.   The introduction of minus interest rate

  Since 2014, negative interest rates have been adopted by central banks of several EU member countries, and ECB also adopted negative interest rate. There have been some influence of negative interest rate of Europe to Japan through the international flows of funds. Declining oil prices have had a major global influence for depressing the prices and the economic conditions for BoJ has been quite adverse in terms of generating inflation.

   Arguments have risen toward 2016 in financial community in Japan that additional major action of easing is needed. Governor Haruhiko Kuroda has been quite cautious about such arguments.

   However, on January 29, BoJ made an epochal announcement that it will introduce negative interest rate. This decision was made in the policy committee held on January 29. Again the issue of introducing negative interest rate has called forth harsh debate within the committee. It was reported later that those support minus interest rate argued that downward risk of prices has been increasing, it is necessary to direct the funds of banks for loans, and introduction of minus interest is only limited. Those who against it argued that economic conditions are not bad and no compelling reason to provide major additional easing, and minus interest rate will suppress profits of financial organizations. And finally decision was made with 5 for and 4 against.

   Mr. Naoki Tabata explains that the basic intention of BoJ to introduce negative interest rate was to bring down the “yield curve” as a whole by pulling down the yield of short term fund by introducing negative rate. This is because commercial banks have had a tendency to concentrate their loans  in short term in order to avoid long term risks. This tendency has disturbed the intention of BoJ to bring down the long term rate indirectly by arbitration by its usual purchase of short term JGB. See Naoki Tabata,”Achievements and lessons of Quantitative and Qualitative Easing” in “Kuroda BoJ: Economic Analysis of Extra-ordinary Monetary Easing.” 2018 Japan Economic News Paper Co.Ltd.

 Introduction of minus interest rate intended to bring down the yield curve as a whole and solicit commercial banks to lend their funds more to businesses making use of lowered long term interest rate, rather than paying interest on their reserve deposit kept in BoJ. Also, in order to minimize the negative effect on profits of commercial banks, the amount of reverse deposit on which minus interest rate is imposed was limited as 23 trillion yen.

 Unfortunately, however, such intentions of BoJ was not well understood by private financial organizations for some period after the introduction of minus interest rate. Worried about the suppression of profitability, mega banks reacted by reducing interest rate for depositors rather than attempting to increase loans to businesses. Commercial banks criticized BoJ rather harshly complaining about the pressure imposed by BoJ to suppress their profits.

   Half a year later, the intention of BoJ seems to have been understood more by private financial organizations. The yield curve as a whole apparently has been pulled down and as a consequence housing loans and corporate investment increased taking advantage of the lowered long term interest rates.


Ⅵ.   The QQE with minus interest and the yield curve control

   Although housing loans and corporate investment for productive equipments have increased thanks to the lowering of long term interest rates, long term interest rate such as of 10 year JGB has been reduced unexpectedly much to even to minus zone so that management of insurance and pension funds have been disturbed substantively.

   Worrying about such substantive disturbances, BoJ began to consider controlling directly both short and long-term interest rates in order to secure reasonable opportunity for insurance companies and pension funds to secure their profits as well as ascertaining profit margins for banks.

    On September 22, 2016, BoJ held policy committee meeting with a special theme entitled “Comprehensive Inspection” of monetary policies. BoJ’s intention was to hold a comprehensive review of environmental changes as well as monetary policy itself and then to arrive at adequate policy directions upon such comprehensive considerations. BoJ’s strategic intent was to justify what it intends to do as note above after the ritual of such “comprehensive review.”

    As a comprehensive review, the meeting identified the major reasons why targeted price increase has not been attained as follows:
  ・Falling down of oil prices,
  ・Stagnant consumption in the wake of consumption tax rate increase
  ・Slow down of developing economies and instability of international financial market
  ・Excessive lowering of interest rate has suppressed profits of financial organization,
       particularly of yields of insurance and pension funds,
    ・price expectations tend to be influenced strongly by the past price performance so that
       it tends to take time to increase price expectation.

    On the basis of such comprehensive review, the committee arrived at the following policy decisions:
   ーQuantitative and qualitative easing will be introduced to control both long term and
       short term yield rates.
 ーAiming at keeping the long-term yield rate in the neighborhood of zero percent, BoJ
      will control purchase of JGB.
   ーContinue the minus interest rate.
   ーContinue monetary easing until 2 percent level stable prices increase will be attained.

  These policy decisions deriving from the comprehensive inspection of financial policies arrived at the policy committee meeting of Sept 22, 2016 meant to keep 10 year JGB yield rate around 0%(within the range of plus and minus 0.1%) by applying a limit order method so that guiding yield rates for longer than 10 years in the positive rate zone and pulling up the yield curve as a whole, and at the same time, making the yield curve for shorter than 10 year terms more steeper so that securing the normal interest rate gap between longer and shorter terms.

   The policy decision arrived at this time included also continued purchase of JGB at an annual pace of 80 trillion yen. This is often called “overshoot commitment” implying that BoJ makes a strong appeal of its unchanged commitment to attain 2% level stable price increases.

   The policy package announced as a result of the comprehensive inspection of monetary policies conducted on Sept. 22, 2016 is generally called  “The quantitative and qualitative easing with minus interest and the yield curve control.”


Ⅶ.   The second term Kurodanomics and fine tuning

 Since Mr. Haruhiko Kuroda was appointed as chairperson of Bank of Japan in March 2013, his term was to be completed by March 2018. There was some discussion about who would be an appropriate successor, but without much discussion Mr. Kuroda was regarded as the most appropriate candidate, largely because prime minister Shinzo Abe wanted Mr. Kuroda to continue.  He was appointed as chairperson for the second term beginning in March 2018.

   During his first term, he has accomplished certain results such as making Japanese economy getting rid of prolonged deflation. Since overcoming deflation was the single most important policy objective of Abe administration, BoJ led by Mr. Kuroda may be said to have contributed this national objective positively.

   At the same time, however, Mr. Kuroda’s policy objective which he publicly committed in April 2013 that BoJ will realize 2 percent level stable inflation within 2 years has been far from being realized. While CPI increased appreciably in 2013 and reached the pace of 1.4 percent in late 2014, it has been disappointingly sluggish since then until recently. As of summer 2018, it remained only 0.8 percent.

   Since BoJ has been obliged to postpone the timing of attaining the target of 2% inflation rate at least 3 times, BoJ changed the policy of announcement at the policy meeting of April 2018 as not to publicly commit the timing. Incidentally, at the policy meeting of January 2019, BoJ predicted that price increase for 2019 would be only 0.9%, far from the target of 2%, implying that it will be a long way until the target will be attained, if any.

   In view of the accumulating huge volume of base money supplied by BoJ which grew as large as Japan’s GDP recently, there arose discussion at various corners as to the need to taper the BoJ’s extra-ordinary monetary easing. With the adoption of normalization policy by FED of the US since 2014 and the inclination of ECB toward the normalization, the argument has been intensified that BoJ, too, needs to normalize its extra-ordinary monetary easing policy before long.

   At the policy meeting of July 31, 2018, BoJ announced a decision to modify its stance of regulating the 10 year yield rate from the zone plus and minus 0.1% to somewhat broader zone of plus and minus 0.2%. This seemingly modest revision implies to control the flow of funds to land and financial assets not to aggravate “bubbles” on the one hand, and still to continue monetary easing to propel economy on the other, by allowing a greater discretion of controlling long term interest rate.

  In allowing for a slightly higher limit of 10 year yield rate with a purpose of mitigating asset inflation, BoJ still remained very nervous and cautious as not to let market players easily interpret that this move implies the tacit action toward the normalization of monetary policy. To ascertain that BoJ continues to commit to extra-ordinary monetary easing until 2% inflation is attained, BoJ stresses to increase purchase of massive JGB, namely, over-shooting policy. The latter policy is also meant to keep the support of reflationary proponents both within and outside of BoJ. Some speculate that BoJ is bound to take this stance at least until October 2019 when 2% increase of consumption tax is committed by Abe administration.


Ⅷ.  Some evaluations

   Having reviewed the progress of Kurodanomics for the last 6 years, let me make some personal evaluation.

1.Mixed achievements of Kurodanomics
     As the primary objective of the initiating Abe administration was to overcome the prolonged deflation, it is fair to say that Kurodanomics has contributed significantly to achieve this goal of Abe administration.
 
     To attain this outcome, BoJ led by Mr. Kuroda exploited a policy mix which has been developed step wise, namely, quantitative monetary easing associated with qualitative easing, then negative or minus interest rate has been introduced at least partially, which is then empowered by introduction of yield curve control. This comprehensive policy mix is vouched by the policy stance of “forward guidance.” To ascertain that BoJ continues to commit strongly to the 2% inflation target, it adopted so-called “over-shooting” policy of committing a voluminous purchase of JGB as much as 80 trillion yen a year since 2014.

    Mr. Naoki Tabata provides a clear, systematic and fair explanation that the policy mix adopted by BoJ led by Mr. Kuroda has been all indispensable and effective to achieve the policy goal to make Japanese economy get rid of prolonged deflation. He quotes an interesting comment by Mr. Benjamin S.Bernanke that whether quantitative easing is  really useful for generating economic growth is not understood. Mr. Tabata clarifies that the monetary easing policy as adopted by Kuroda’s BoJ was indeed useful to generate growth in terms of theoretical analysis. See for details, Tabata, Naoki

 On the other hand, the public commitment of Mr. Kuroda that he would achieve 2% stable pace of inflation within two years since spring 2014, if not earlier, has not been attained at all. In fact, having elapsed 6 years, the reality is far from the target, as reviewed earlier. Nevertheless, Mr. Kuroda strongly commits to this goal, and exploits every possible means to achieve that goal such as voluminous bazooka and overshooting commitments.Ironically enough, the more Mr. Kuroda commits to this promise of attaining the goal, the amount of the stock of base money increases which has recently grew as much as the total amount of GDP. This provokes the question as to how to normalize the situation, or to put differently, what and how the exit will be realized. Another serious question is worries about, which is the danger of economic crisis incurring possibly from this abnormal accumulation of base money, or the asset of BoJ.

2.   Is 2 percent inflation goal divine?
   The primary issue associated with the negative aspect of Kurodanomics, it seems, is his strong commitment to 2% stable inflation rate as his target. The historically and internationally unprecedented and even dangerous amount of accumulated stock of base money has been basically arising from the stubborn commitment to achieve the 2% inflation goal. Can this quantitative goal not be changed or modified, particularly in view of various drastic changes of global and Japanese economic conditions since the outset of Kuroda regime.

   In fact, the commitment to the 2 percent goal has been made between BoJ and the government in January 2013 in the Accord of the Government and BoJ, prior to the time Mr. Kuroda took the office of BoJ. This means that the commitment to the 2% goal cannot be changed unilaterally by BoJ. One may ask whether the government and BoJ consult with each other seriously as to change this commitment. This seems unlikely in view of the fact that both prime minister Abe and Mr. Kuroda stated recently on different occasions that they respect the Accord and has no intention to change.

   However, the Accord has a more comprehensive content rather than sheer commitment to the 2% target. It emphasizes that fiscal policy and monetary policy need to support with each other to achieve this goal. Interpreting this notion honestly, the Accord asks the duty of fiscal policy which the government is responsible as well as the duty of BoJ. One may ask whether the government is satisfying the required task of achieving and maintaining the healthy fiscal conditions. Some observers have speculated how much Mr. Kuroda was shocked by the prime minister’s announcement of postponing the timing of consumption tax rate from 8 to 10 shortly after Mr.Kuroda executed the second bazooka in October 2014.

  FED of the US and ECB of Europe have altered the massive monetary easing policy much prior to achieving the targeted inflation rate, perhaps by considering changes of economic conditions flexibly. One is left with a question why only BoJ cannot change the commitment more flexibly with changes of important economic conditions.

3.   Exit strategy:what to plan and how to proceed?
   With the huge accumulation of the stock of base money in the process of extra-ordinary dimensional monetary easing, the size of balance sheet of BoJ has increased extra-ordinarily, too. The aggregate size of base money grew as much as the size of Japan’s GDP recently.

  The US FED expanded supply of base money massively after the Lehman shock, but the total amount relative to US GDP when FED started normalization remained only 20%. The normalization process of the FED has taken several years since, and is expected to take another several years until it attains the reasonable equilibrium. In view of the experience of FED, the exit prospect for BoJ is unimaginable.

   The size is a problem because in the process of exiting the huge asset of BoJ will have to be absorbed by the global market. Given the size as much as GDP, selling the huge amount in a way not to incur excessive reactions on the market within a reasonable time horizon is extremely difficult. We need to plan the process very carefully mobilizing all the possible expertise and information.

   In the case of BoJ, there is a more serious problem than a problem of sheer size. That is, the most of the JGB purchased by BoJ from commercial banks are kept as checking account of BoJ. The negative interest rate imposed on the deposit of commercial banks and other financial organizations kept as checking account was only a very minor portion of the total amount of their checking account. The total amount has reached the amount of 300 trillion yen. The problem is that the most of it is paid a modest interest rate as 0.1% by BoJ.

   When BoJ tries to initiate the process of normalization, the market interest rate will increase. If the interest rate increases sizably it will increase the loss of BoJ dramatically. For instance, if the interest rate goes up to 1%, the interest payment to the checking account of commercial banks and other financial institutions will increase up to 3 trillion yen.

   Since the equity capital or net worth of BoJ is not that large, this massive payment may well threaten the healthy financial balance of BoJ. Although BoJ may not bankrupt as some critiques comment, this may well jeopardize the credibility of Japan’s central bank. Lowering of credibility of the central bank may well lead to many undesirable consequences such as falling down of exchange rate etc.

   Japanese economy is entering into an extremely critical phase in these years where it   needs alert, sensible and responsible policy determination and execution, especially because the global economic conditions are getting worse since the abnormally long prosperity of the last decade is expiring and drastically destructive events are taking place such as Mr. Trump’s selfish and ultra-nationalistic policy, Brexit and increasingly unstable European economy, rapid decline of Chinese economy, deteriorating economic conditions of emerging economies. And, lagged response of Japanese economic policies to tackle  issues of aging of population, dramatic technological change and dangerously accumulated government fiscal debt. Facing with these issues, the challenges for Japan’s financial policy are getting ever more critical and pressing.

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