Kuroda will be the ‘ Carlos Ghosn’ of BOJ
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.