Kuroda will be the ‘ Car­los Ghosn’ of BOJ

The Pak Banker - - COMPANIES/BOSS -

Ja­panese Prime Min­is­ter Shinzo Abe has nom­i­nated Haruhiko Kuroda, the cur­rent head of the Asian Devel­op­ment Bank, to be the new Bank of Ja­pan (BoJ) Gov­er­nor. This is a bold move that should al­low Ja­pan to press the “re­set” but­ton on its mon­e­tary pol­icy.

I be­lieve he’s likely to suc­ceed where other BoJ gov­er­nors have not and make some progress in de­feat­ing de­fla­tion. At least, he should make some progress in weak­en­ing the yen. Here’s why. Kuroda has been a long­time critic of the cen­tral bank’s mon­e­tary poli­cies through­out his ca­reer in the fi­nance min­istry, in academia and in his cur­rent po­si­tion. He wrote a book ti­tled “Success and Fail­ure in Fis­cal and Mon­e­tary Pol­icy” in which he blames the BoJ for a va­ri­ety of mon­e­tary mis­takes rang­ing from be­ing too ac­com­moda­tive dur­ing the Bub­ble Era of the late 1980s to be­ing too re­stric­tive in the early part of this cen­tury.

One of the newly nom­i­nated deputy gov­er­nors, Pro­fes­sor Kikuo Iwata, goes even fur­ther. A pro­fes­sor of eco­nom­ics at Gakushuin Univer­sity, he has been a con­sis­tent critic of the BoJ since the early 1990s, when he en­gaged in a pub­lic de­bate with a se­nior BoJ of­fi­cial over mon­e­tary pol­icy in a re­spected Ja­panese eco­nomic mag­a­zine. Just last year he pub­lished a book en­ti­tled “The Guardian of De­fla­tion,” his dis- parag­ing nick­name for the BoJ. He re­cently de­clared that “the BoJ needs a regime change.”

That drive for “regime change” is the main rea­son I think th­ese two may suc­ceed. All or­ga­ni­za­tions have a “house view,” a con­sen­sus that de­vel­ops over time on how to deal with prob­lems. Of course there are in­ter­nal de­bates, and the BoJ, with out­siders sit­ting on its Mon­e­tary Pol­icy Board, prob­a­bly has more such de­bates than many other in­sti­tu­tions. Yet there has been a con­sis­tent of­fi­cial view that de­fla­tion can­not be de­feated by mon­e­tary means. And chang­ing the “house view” in Ja­pan is even more dif­fi­cult than chang­ing it in other or­ga­ni­za­tions.

The prob­lem is the role that con- ti­nu­ity and prece­dent play in the Ja­panese bu­reau­cracy. Ac­cord­ing to the late Ja­panese psy­chi­a­trist and cul­tural critic Dr Masao Miyamoto, “con­ti­nu­ity is the most im­por­tant con­cept for the bu­reau­crats.” That’s be­cause chang­ing pol­icy is tan­ta­mount to say­ing that the peo­ple who set pol­icy be­fore were wrong, and that just isn’t done in a hi­er­ar­chi­cal or­ga­ni­za­tion where one’s ca­reer can de­pend on the help of those who are more se­nior to you.

The left hand col­umn is the ra­tio be­tween BOJ’s bal­ance sheet and the Fed’s, while the right hand col­umn tracks the cor­re­spond­ing USD/Yen move­ment. “The sta­tus quo in the Ja­panese bu­reau­cracy is la­beled as prece­dence and one should al­ways re­spect prece­dents that have been set,” is the way Dr. Miyamoto ex­plained the way of think­ing at the Min­istry of Health and Wel­fare, where he worked in the 1990s.

The of­fi­cial BoJ line for years has been to down­play the ef­fec­tive­ness of quan­ti­ta­tive eas­ing and to play up the risks, as the out­go­ing BoJ Gov­er­nor, Masaaki Shi­rakawa has done. It would be “dif­fi­cult” (Ja­panese for “im­pos­si­ble”) for a ca­reer BoJ per­son to al­ter the nar­ra­tive that has dom­i­nated the cen­tral bank’s think­ing for so many years.

The prob­lem isn’t just in the government. Look at Nis­san Mo­tor (Tokyo Stock Ex­change: 7201.TJP), for ex­am­ple. The com­pany lost money for seven out of the pre­vi­ous eight years be­fore Car­los Ghosn took over in 2001, but has been prof­itable ever since, ex­cept for the year of the fi­nan­cial cri­sis. A lot of what he did to turn the com­pany around wasn’t par­tic­u­larly spe­cial; it didn’t take a man­age­ment ge­nius to fig­ure out that cut­ting the num­ber of sup­pli­ers in half might save money, or that there might be bet­ter use for the firm’s cap­i­tal than hold­ing stock in 1,394 com­pa­nies.So why didn’t it hap­pen be­fore? Be­cause an in­sider could never have taken the de­ci­sion to cut 14 per­cent of the work­force or sell off prized as­sets. Such an as­sault on con­ti­nu­ity and prece­dent would be in­con­ceiv­able in the tra­di­tional Ja­panese con­text.

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