Insight: After years of dissent, new BOJ head leads regime change

Haruhiko Kuroda had reason to be frustrated when he retired as Japan's currency czar a decade ago.

The man now plucked to run the Bank of Japan and revive the long stagnant economy was a career Ministry of Finance bureaucrat at the time exasperated that the central bank had - as he saw it - shirked its duty to end what was then already six years of deflation. Much bolder action was needed, he argued.

Instead, he was forced to watch from the sidelines as his successor at the finance ministry and a new BOJ governor followed policies similar to what he had prescribed to kick start the economy. The exercise saw the finance ministry dump 35 trillion yen ($370 billion) on foreign exchange markets to curb yen strength, while the BOJ pumped 15 trillion yen into the banking system to spur the economy.

And it worked. After three years of sub-1 percent growth, Japan's GDP bounced back by 2.4 percent in 2004, a pace not beaten until 2010.

Fast forward to today and Kuroda finally has the chance to implement the policies he was prescribing a decade ago in what will amount to a monetary shock-and-awe campaign, interviews with more than a dozen people familiar with him and a review of his writings suggest.

Japan's economy desperately needs answers. It is still mired in low-grade deflation and has suffered four recessions since 2000. An ageing population and weak consumption is gradually hollowing out much of the manufacturing base that provided the foundation for Japan's modern economy.

"It's hard to understand why the BOJ is still cautious about adopting a price-stability target," Kuroda wrote, eight years ago, before the central bank was strong-armed this year into adopting a binding inflation target of 2 percent.

"Deflation won't be eradicated unless the BOJ sets a clear price-stability target of around 2 percent and eliminates deflationary expectations with relentless monetary easing."

Through a spokeswoman at the Asian Development Bank, where he was president until last week, Kuroda declined to comment for this article.

Kuroda's beef with the central bank in 2003 was its belief that it could do little to relax policy further after pushing its policy rate to zero and that it had even suggested some deflation - where prices are trending down - was acceptable.

That period would prove important for another reason: the government posted Kuroda for a year as special adviser to the cabinet of Junichiro Koizumi, giving the civil servant sustained exposure to politicians at the highest levels. Previously, as a ministry official, he had visited the Cabinet Office to discuss the MOF's intervention strategy and the importance of containing the yen with officials such as a junior minister named Shinzo Abe.


Now prime minister, Abe has chosen Kuroda, 68, from the top job at the ADB, to run the BOJ. On Thursday, Abe will formally commission Kuroda as central bank chief.

In appointing Kuroda, Abe has taken a big step toward advancing what he has privately described as his goal of "regime change" at the central bank, according to a person close to the prime minister.

In fact, Kuroda was a proponent of "Abenomics", the name given to the prime minister's policy mix, long before Abe himself. The premier has made waves in financial markets over the past four months, pushing down the yen and boosting stocks - and his own popularity - with a plan in which a far more aggressive BOJ plays a major part.

Kuroda has been beating that drum for years and his comments in confirmation hearings in the past two weeks suggest he plans to pump cash into the economy much more aggressively than outgoing Governor Masaaki Shirakawa, who was reluctant to be too bold for fear of sowing the seeds of future problems, such as an economic bubble. Kuroda's first scheduled policy meeting in charge will be on April 3-4.

As far back as 2002, while vice minister, Kuroda used an opinion column in the Financial Times, co-written with his deputy at the finance ministry, to call for "aggressive monetary policy" from the central bank, including an inflation target, aimed at "drastically changing price expectations."

His outspoken chiding of the independent central bank earned Kuroda an official rebuke from one of his superiors, said a person familiar with the exchange. He stopped publicly criticizing the central bank while in office, this person said, but was back at it in 2005, with his book, "Successes and Failures of Fiscal and Monetary Policy."

Apart from calling for a 2 percent inflation target, he urged sustained quantitative easing, or pumping cash into the economy, and blasted the BOJ for timidity and for undercutting its own easing policies by refusing to play cheerleader with financial markets.

People who have worked with Kuroda say he has always had a calm tenacity in defending Japan's policies to global policymakers. Kuroda himself takes credit for convincing his counterparts in the Group of Seven advanced nations that Japan's currency intervention was for the good of the Japanese and global economies.

"Kuroda always reminded me a bit of a Japanese version of the Mr. Spock character on the old U.S. television series Star Trek - always logical, analytical and reasoned above all else," said Curtis S. Chin, a former U.S. ambassador to the ADB.

"But every now and then a bit of humanity or a smile might break out amidst all the macroeconomic theories and facts and figures that are his true comfort zone. He was always open to reason and discussion."

Kuroda also has a reputation for being an intellectual omnivore, a voracious reader who has bided his time in airport lounges with everything from the philosophy of Wittgenstein to detective novels.

Like many Japanese bureaucrats on the fast track, Kuroda studied law at Tokyo University but then left Japan to get a master's degree in economics at Oxford, training that set him apart from his peers.


As he rose through the ranks at the finance ministry, Kuroda also came to believe that Japan's fiscal policy was a limited weapon to boost the economy. Taxes would have to be raised and budget decisions could only be made once or twice a year.

By contrast, he wrote in 2005, "monetary policy has the maneuverability and flexibility of always being able to be deployed instantly."

At the time, Kuroda was urging the central bank to work with the government to defeat inflation - foreshadowing a joint reflationary policy that the Abe government and the BOJ signed in January.

He said the BOJ's coveted independence from the government, granted in 1998, was "clearly mistakenly timed." The central bank, Kuroda said, had misused its new autonomy to commit the "fatal error" of going against the government in a premature policy tightening that subsequently set the economy back.

While Abe was considering candidates to head the BOJ and two deputies, international and domestic politics were working in Kuroda's favor, people close to the process say.

Japan was taking political heat from as far afield as China and Germany that Tokyo was resorting to a beggar-thy-neighbor policy of "currency wars" aimed at cheapening the yen and its exports to gain competitive advantage.

Kuroda was seen by many people near Abe as the best suited to argue with the world's financial chieftains that Japan was not debasing its currency to goose exports, but rather was seeking to end crippling deflation and regain economic vibrancy -- good for the global economy -- and that a weaker yen was simply the natural byproduct of sensible policies.

Kuroda's years in the international wing of the ministry, including as Japan's "sherpa" in guiding G7 meetings, gave him ample experience in defending controversial policies, including his own campaigns of massive yen-selling currency intervention.

People familiar with Abe's selection of Kuroda say this gave him an advantage over several other candidates. Toshiro Muto, who scaled one rung higher up the Finance Ministry ladder than Kuroda to the top bureaucratic post, had little international financial exposure.

While Muto was seen in the early running as the leading candidate with finance ministry backing, Abe remained interested in Kuroda, people who were involved in the process say.

Although Kuroda has criticized Shirakawa only obliquely in recent days, he had some choice words for the then-BOJ bureaucrat in his 2005 book. Kuroda wrote that essays by Shirakawa clearly showed the bank's thinking. "Unfortunately, all his efforts have been concentrated on championing the BOJ's mistaken policies."

On Tuesday, before heading off to resume his hobby of bird-watching, Shirakawa took a parting shot at Kuroda's brand of playing to the financial markets, something Kuroda says is needed to maximize the effect of BOJ policy.

Shirakawa, whose five-year term coincided with the 2008 financial crisis and the 2011 earthquake and tsunami, always seemed deeply uncomfortable in the spotlight.

"What may be desirable for market participants may not necessarily be the same as what is desirable for the economy in the long run," Shirakawa told a farewell news conference.

"I feel it is dangerous to believe that central banks can freely control market moves with words."

(Additional reporting by Sumio Ito, Kaori Kaneko, Yuko Yoshikawa, Yoshiko Mori, Kazuhiko Tamaki, Tetsushi Kajimoto, Izumi Nakagawa and Kevin Krolicki; Writing by William Mallard; Editing by Neil Fullick)