Markets were bracing for disappointment in the days before the Bank of Japan’s policy decision on Thursday – inevitably, perhaps, given the Fuji-sized pile of expectations that had built up ahead of Haruhiko Kuroda’s first meeting as governor. This week, the yen crept back up against the dollar and shares sagged.
Short of driving an open lorry full of cash out of the central bank’s gates, it seemed there would be little Mr Kuroda could do to satisfy the army of traders that had sold the Japanese currency and bought stocks in anticipation of aggressive new easing.
In the event, however, he delivered more than almost anyone had predicted. While he did not scatter money from the back of a Toyota, he came about as close as a central banker might dare. And just as importantly, he did it with the overwhelming support of his nine-member board.
In what Mr Kuroda called a “new dimension in monetary easing”, the BoJ pledged to double both its purchases of Japanese government bonds and Japan’s monetary base. It also formally adopted a two-year target for turning the country’s mild deflation into 2 per cent inflation – a timeframe that had previously been more of a personal goal of Mr Kuroda and Prime Minister Shinzo Abe.
And instead of bringing forward the start date for an expanded programme of asset-buying, as many analysts had predicted it would, it scrapped its existing scheme altogether in favour of a simpler, bolder approach. Quantitative easing will no longer be relegated to a separate and temporary-looking part of its balance sheet. Now, Mr Kuroda appears to be saying, it is at the core of what the BoJ does.
A big question before the meeting was how much support the new governor could muster for radical steps. Most members of the board served under his more hawkish predecessor, Masaaki Shirakawa, and there were concerns that some, at least, would balk at wholesale regime change.
The delicate task facing Mr Kuroda – a former senior finance ministry official who most recently ran the Asian Development Bank – was to get his way without opening a rift. If his plans for more aggressive easing had been supported by only a narrow majority, for instance, it might have signalled that he had reached the limit of what he could do in his first time out.
That could have killed the inflationary expectations that he has been working so hard to build just as effectively as if he had had his plans rejected outright. Many had expected him to water down his proposals, or save some for a future meeting, in order to secure a consensus.
“The timing was a surprise and the magnitude was more than expected,” says Hiromichi Shirakawa, an analyst at Credit Suisse.
In the end, Mr Kuroda managed to keep it radical and win over the board. The vote tally announced by the BoJ showed a single dissent on one of four separate proposals. In addition to buying more and longer-dated bonds – even 40-year debt will be eligible for purchase – the bank will also buy shares in stock and real estate funds.
By pushing up asset prices, Mr Kuroda wants to spur investment and increase the opportunity cost of hoarding cash – a “qualitative” dimension to quantitative easing, or “Q-squared” in the new BoJ-speak.
The wholesale turnround from Mr Shirakawa’s day is striking. People close to the board’s deliberations say previously cautious members were persuaded by Mr Abe’s assurances that the government would use the economic cushion created by easier money to pursue structural reform and a long-term plan to reduce Japan’s public debt. An entrenched institutional tendency to follow the governor’s lead no doubt helped as well.
Success will bring its own pressures. Mr Kuroda hopes to beat deflation by rejecting incrementalism and throwing everything the bank has at the problem at once: “I am confident that all the policies we need to achieve 2 per cent inflation in around two years are now in place,” he said.
If he and his monetarist allies are right, it means there is little left for the bank to do but sit back and watch as prices gradually rise. If he is wrong, and deflation turns out to be the more complex structural problem that his predecessors have always said it was, he will have few other options in reserve.
“If it doesn’t work,” says one person close to the leadership, “the it means this kind of approach doesn’t work.”