Kuroda less dovish as he departs BOJ after decade of massive stimulus

Haruhiko Kuroda took a slightly less dovish tack in his farewell as Japan’s central bank chief on Friday, ending a decade of unconventional policy that included a “bazooka” of stimulus aimed at boosting inflation and sustainable growth.

Handing the reins of the Bank of Japan (BOJ) to academic Kazuo Ueda, Kuroda pointed to progress under his radical easy-money policy, which featured a push to change public perceptions with a wall of money and Peter Pan metaphors.

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“Japan’s 15 years of deflation has created a strong perception among the public that prices and wages won’t rise,” Kuroda, 78, told a news conference marking the end on Saturday of his second five-year term.

“But such a perception, or norm, is starting to change. As such, I think the timing for achieving the BOJ’s inflation target stably and sustainably is nearing,” he said.

Picked by then-Prime Minister Shinzo Abe to break Japan out of deflation, Kuroda will see his second, five-year term end on Saturday and hand over the baton to his successor.

Shock therapy was among the key features of Kuroda’s monetary experiment, under which the BOJ deployed a huge asset-buying programme in 2013 partly to convince the public that prices will finally start to rise after decades of deflation.

Kuroda was not the first BOJ chief to attempt to influence public perceptions with monetary easing. Toshihiko Fukui, who presided from 2003 to 2008, frequently expanded quantitative easing to “show the BOJ’s determination to beat deflation” and “exert stronger influence on public expectations.”

But Kuroda went a step further by binding policy to his 2% inflation target and setting a two-year timeframe for meeting the goal. The target remained elusive only until recently, when the war in Ukraine boosted global commodity prices and pushed inflation well above 2%.

Simple communication was also a key feature of Kuroda’s policy. In 2015, he alluded to the Peter Pan fairy tale in explaining that to fire up inflation, the BOJ needed to have the public believe in its monetary magic with massive stimulus.

“I trust that many of you are familiar with the story of Peter Pan, in which it says, ‘The moment you doubt whether you can fly, you cease forever to be able to do it’,” he said then. “Yes, what we need is a positive attitude and conviction.”

In another speech that year, Kuroda described how, like a spacecraft attempting to move away from Earth’s gravitation, “tremendous velocity” was needed to end Japan’s deflationary equilibrium.

When allusions to Peter Pan and spacecraft failed, the BOJ shifted to a defensive, long-term approach in 2016 with the introduction of yield curve control (YCC). The hope was that by capping long-term rates around zero and patiently reflating the economy, inflation would eventually perk up.

The shift to YCC also sought to stop super-long yields from falling too much, a nod to growing concern that prolonged low rates could hurt financial institutions’ profits enough to discourage them from boosting lending.

“The BOJ’s thinking on interest rate changed dramatically in 2016. It abandoned the idea that the lower the borrowing costs, the better,” said former BOJ board member Takahide Kiuchi.

While the BOJ continues its battle to prop up inflation and wages, other major central banks have seen their credibility on the line as they struggle to tame soaring inflation.

If Japan sees inflation sustainably hitting 2%, incoming BOJ chief Ueda will face a fresh communication challenge of steering a smooth exit from his predecessor’s radical stimulus.

“During Kuroda’s era, the BOJ put in place a mixed bag of unconventional measures,” Kiuchi said. “The BOJ’s failure to change public expectations raises a lot of questions about the effectiveness of unconventional monetary policy.”