Dow Jones
The Bank of Japan’s surprise move to flood the economy with more money boosted stock prices and gave a lift to its fight against deflation, but a rare split vote over the decision means further action will be difficult for governor Haruhiko Kuroda.
Those with knowledge of the manoeuverings behind Friday’s 5-4 decision point to growing skepticism among the BoJ’s nine policy board members toward the radical policy rolled out by Kuroda a year-and-a-half ago.
Some sceptics of easing say it is a mistake to drive down the yen, as Friday’s actions did, because they hurt Japanese companies that rely on imported fuel or materials. Others more broadly question Kuroda’s fundamental goal of achieving 2% inflation, saying it would be better to focus on deregulation and structural changes to Japan’s economy such as making it easier to hire and fire workers.
“Opposition within the BoJ looks likely to continue,” said a former board member who has close ties to some present members. Another person familiar with the board’s views said the gap between Kuroda and other members was growing and represented the “biggest problem” for the central-bank chief.
The BoJ said it would aim to purchase €80tn ($712bn) in Japanese government bonds annually, up from ¥60tn to ¥70tn currently. It also said it would triple its purchases of stock funds to ¥3tn annually, among other steps.
Kuroda’s trouble in winning over his own board contrasts with the exuberant reaction of global markets. After the Nikkei Stock Average rose nearly 5% to a seven-year high on the news, the Dow Jones Industrial Average followed suit by reaching a record high.
In effect, the markets endorsed Kuroda’s view that extraordinary steps were needed to lift inflation expectations. He has said Japan needs steady price rises to drive down real interest rates, the rates borrowers pay after accounting for inflation, and encourage investing in riskier assets. That, he says, will produce a virtuous cycle of higher spending, wages and growth.
Failure to take additional easing steps “could cause a significant delay in our attempts to change the deflationary mind-set, despite the progress we have made,” Kuroda said on Friday.
He took a gamble that his proposal could get the required majority of the BoJ’s policy board and barely made it, presiding over the first split vote on his main policy framework since he took the helm of the central bank in April 2013. It was only the second time that so many board members cast no votes since 1998, when a revision in the law governing the bank gave it independence from the government.
Of the four dissenters, two are former private-sector economists and the other two are former business executives. The economists have been sceptical about Kuroda’s inflation target, and one of them, Takahide Kiuchi, has regularly proposed at board meetings to water it down.
According to minutes of a BoJ board meeting in September, one member said “additional measures to stimulate demand carry the risk of growing financial imbalances or weakening the public’s recognition of the need for structural reform.” The member wasn’t identified. Critics have said the BoJ’s dominant role buying government debt has distorted financial markets, pointing to negative interest rates on some short-term debt.
What came as a surprise were the no votes cast by the two members from the business community. Both Yoshihisa Morimoto, a former power-company executive, and former Sumitomo Bank executive Koji Ishida have generally voted with the majority, and BoJ officials have said Kuroda respects their hands-on experience.
The two didn’t explain their votes, but Japan’s leading business lobby, Keidanren, has warned recently against an overly weak yen. Business leaders have said a weak currency may discourage consumption because people have to pay more for imported goods.
Although economic theory says a falling yen should make Japanese goods more competitive overseas and boost exports, that didn’t happen after the sharp drop of the yen triggered by Kuroda’s initial monetary “bazooka” last year.
On Saturday, the head of the opposition Democratic Party of Japan said the BoJ’s latest action would hurt average Japanese. “It should not do things that hurt the value of the yen,” Banri Kaieda told a gathering.
The road ahead for Kuroda could get rockier because one of his backers on the board, academic Ryuzo Miyao, finishes his term in March. Advisers to Prime Minister Shinzo Abe, who picked Kuroda for the top post, already are discussing Miyao’s replacement, government officials said.
The dynamics on the board could prove crucial next year if Kuroda still appears to be falling short of achieving his 2% inflation goal. The BoJ’s official median forecast, released Friday, calls for 1.7% inflation in the year that ends March 2016,