BOJ’s architect of ‘shock and awe’ plots retreat from stimulus

Deputy governor Amamiya trying to steer toward future rate hike

TOKYO: More than five years into a radical plan to boost the world’s third-biggest economy, the Bank of Japan sent a message of quiet surrender last week, admitting it couldn’t stoke inflation and walking back steps intended to do so.

The man leading the BOJ away from its program of unprecedented asset-buying and low or negative interest rates is the man who largely crafted the measures in the first place, bank deputy governor Masayoshi Amamiya. A fan of classical music who has recently begun to favor Russian composers, Amamiya “plays the piano, guitar and flute well,” says a person who has known him for decades.

Unlike many previous central bank leaders, who took an academic approach to policy, Amamiya simply “tries to create something new,” the person said.

The career central banker’s latest creation, a mechanism for unwinding much of his previous work, has been quietly under development for almost a year. Interviews by Reuters with a dozen people familiar with the bank’s thinking reveal for the first time that there were plans to raise rates twice this year.

In January, market turbulence pulled the rug from under an announcement of an increase. The bank then hoped to signal higher rates in July and raise them in September, but weak inflation data scuttled that idea too. Neither plan was made public.

Last week, the central bank took more subtle action, rolling back parts of its policies that have hurt banks, paralyzed Japan’s bond market and distorted stock prices even as they failed to ignite healthy inflation.

The move represented a compromise Amamiya forged with his boss, bank governor Haruhiko Kuroda, to appease doves on the policy board with a promise to keep rates very low for an extended period.

He swung a key vote, deputy governor Masazumi Wakatabe, allowing the new policy to move forward without any clouds of doubt from a senior official.

“The latest steps marked a major turning point for Kuroda’s stimulus program,” a source said. “The reflationists have become a minority, which means the BOJ is turning more hawkish.” Amamiya, who largely crafted Kuroda’s initially successful “shock-and-awe” campaign, may now be more mindful of his own legacy, insiders say. The Bank of Japan declined to comment for this article.

A roadmap to a sustainable stimulus program could serve as his own path to succeeding Kuroda as governor in five years. But there are no easy answers. A few more years of ultra-low rates could drag down weak regional banks. Explicitly raising rates may trigger an unwelcome increase in the yen that could cool the export-reliant economy and anger politicians.

“Unwinding monetary support is far more difficult than expanding it,” said a former BOJ policymaker who retains close contact with incumbent central bankers.

And looming in the background is the stubborn fact that low rates have done nothing to nudge inflation toward the central bank’s target of 2 percent.

“Everyone at the BOJ knows what they’re doing now is quite radical and needs amending at some point,” another source said.

Mr BoJ

Dubbed “Mr. BOJ” by central bank watchers for innovating most of the bank’s recent bold monetary easing tools, the 62-year-old Amamiya has spent most of his career at the monetary affairs department, which drafts policy and speeches. His candid, down-to-earth style won him close ties with powerful politicians and business executives, helping lift him to the second-highest position in the central bank.

But even the politically savvy Amamiya was blindsided by public backlash after the bank, desperate to protect a fragile economy from a strengthening yen, pushed short-term rates below zero in January 2016.

The move proved to be a disaster. Amamiya, who had three years earlier won praise for spearheading Kuroda’s radical stimulus, received daily visits from bank executives furious about low bond yields, which were crushing margins. At his direction, bureaucrats soon were huddled in the seventh-floor meeting room at the BOJ’s headquarters in Tokyo, searching for ways to support yields that had sunk far below the level they were shooting for.

Their brainstorming led to a policy called yield curve control, which kept short-term rates negative and guided long-term rates to around zero. The policy represented the first tool carefully designed to unwind Kuroda’s massive asset-buying program.

It freed the bank from its obligation to buy a fixed amount of bonds, allowing it to steadily slow bond purchases to roughly half of what it had loosely pledged just enough to keep yields pinned near zero.

“In a way, it was back to orthodox monetary policy that used interest rate targets as a policy tool,” a third source said. “It was the first step toward policy normalization.”