TOKYO – Japan’s parliament on Friday endorsed Haruhiko Kuroda, a finance ministry veteran and president of the Asian Development Bank, to become central bank governor and spearhead efforts to break the world’s third-largest economy out of its long bout of deflation.
Kuroda’s support is crucial to Prime Minister Shinzo Abe’s efforts to revive the economy through a combination of monetary easing, robust government spending and longer-term reforms.
Trends have proved favourable for Abe since he took office late last year. The yen has dropped more than 20 per cent against the U.S. dollar in a coup for beleaguered export manufacturers. Share prices have surged, with the benchmark Nikkei 225 index up 27 per cent in the past three months.
The economy did better than first thought in the last quarter of 2012, eking out a slight expansion instead of shrinking, suggesting that the world’s No. 3 economy was emerging from recession when Abe took over.
Approvals by the lower house of parliament on Thursday and by the upper house Friday morning only allow Kuroda to stand in for current Bank of Japan Gov. Masaaki Shirakawa after he steps down on March 19, three weeks before his five-year term was due to end. Another vote is required to make his appointment permanent.
But the ruling Liberal Democrats have lined up support for Kuroda from the main opposition party, which still controls parliament’s upper house, and Kuroda and two new deputy governors, Kikuo Iwata, a professor at Tokyo’s Gakushuin University, and Hiroshi Nakaso, an executive director at the BOJ, are likely to get the final green light to helm the central bank.
Kuroda, an Oxford-educated economist who proved an effective fund raiser at the ADB, has vowed to “do whatever it takes” to achieve a 2 per cent inflation target as soon as possible. Since interest rates are already at rock bottom, the central bank can only adopt other strategies such as expanding asset purchases or lengthening the maturities of government bonds to help increase the flow of funds in the economy.
“This is kind of an experiment,” said Masayuki Kichikawa, of Bank of America-Merrill Lynch. At least, he says, “It’s worth trying.”
Some economists and policy makers, including Shirakawa, contend that Japan’s deflation stems from structural problems such as a declining and aging population that cannot be resolved through monetary policy. Critics of Abe’s approach also fret that heavy deficit spending could undermine confidence in Japan’s fiscal health. That could spill over into the government bond market, raising yields and sharply increasing the costs of servicing the country’s massive national debt, the biggest among the major developed economies.
But since his days managing currency affairs for the Finance Ministry, Kuroda has long argued that Japan, like other major industrial nations, needs an inflation benchmark to anchor its currency.
What Japan needs, Kichikawa says, is a bit of luck in the form, for example, of a strong U.S. economic recovery.
Abe also needs some tailwinds at home. If inflation pushes living costs higher without a matching increase in purchasing power through higher wages and employment, consumers will not boost the spending that drives Japan’s economic growth.
So far, workers are winning some modest concessions in the annual “shunto,” or spring labour talks, with automakers and some other industries agreeing to slight increases in bonuses and base wages.
Meanwhile, recent data reflect mixed trends. Corporate business confidence is higher, but spending has not yet recovered. Machinery orders last month were weaker than expected.
Japan’s changing of the monetary guard could be followed by one in China, where the governor of the People’s Bank of China, Zhou Xiaochuan, might be replaced Friday in a once-in-a-decade changing of the Communist Party top leadership.
At 65, Zhou is on the cusp of retirement after a decade as central bank governor. Earlier in the week he was elected a vice chairman of a top government advisory committee — a move that suggests he may be preparing to step down.
But many in China are hoping Zhou might stay on, as the country struggles to balance a need to stimulate growth with the ever-present threat that stimulus might reignite inflation.