Pet bank gets a new Suga daddy

Yoshihide Suga's first big decision as Japan's new prime minister is deciding what directive to give the central bank. To be sure, Suga's to-do list is long and daunting. It includes who gets the plum cabinet jobs, which world leader gets his first phone call and which foreign capital to visit first. But as the economy sputters, no question looms larger than how hands-on he will be with the Bank of Japan.

If two news items on Sunday are any guide, Suga is likely to micromanage BOJ policies even more than Shinzo Abe did.

One was fresh evidence that the nation's biggest manufacturers are pessimistic for a 14th straight month, dashing hopes for even the mildest of recoveries for the Covid19-stricken economy. The other was Suga saying he'll set no limit on how many bonds his government issues to end the recession.

In other words, expect BOJ Governor Haruhiko Kuroda's team to smooth out the process and hold international credit rating companies at bay. And expect, in the process, for the BOJ to lose whatever semblance of independence it retains.

The obedient bank

Granted, BOJ autonomy has long been more of a kabuki performance than a quantifiable arrangement. Some quick history: The central bank only won legal independence for the first time in 1998.

Previously, the BOJ stuck to the charter written in 1942 and based on the Reichsbank of Nazi Germany, enacted at the height of World War II. That had replaced the earlier Bank of Japan Act dating back to 1882.

Though a new model was debated time and time again, it didn't get formally changed until the aftermath of the 1997-1998 Asian financial crisis. The new law handed the BOJ a "price stability" mandate not unlike that of the US Federal Reserve. The BOJ also had wiggle room for policymakers to support job growth.

Too much, it turned out.

The BOJ "has often faced tradeoffs between guns and butter, stability and growth, the threat of economic backlash and the moral hazard problem," says economist Masato Shizume of Waseda University. "The bank has been and still is learning from new challenges."

Three years after

winning independence, the BOJ found itself dealing with an imploding economy. The cause: a bad-loan crisis that elected officials failed to address. Rather than upset vested interests, politicians pressured the

BOJ to support the economy. It included a very public effort to shame BOJ policymakers.

The result? Quantitative easing. After the first QE burst, a succession of governments demanded the BOJ do more. Enter Prime Minister Shinzo Abe, who in 2012 threatened to revise laws guaranteeing BOJ independence. Abe's planned amendments to the BOJ Law would empower the government to layer new responsibilities on to the BOJ.

Up until that point, the government was barred from sacking the BOJ governor or senior board members. The BOJ got the point, though. It bought Abe's silence with a monetary onslaught the likes of which world markets had never seen. By March 2013, Abe had a new BOJ leader in the job, Haruhiko Kuroda, to push into even more uncharted territory. And a new 2% inflation target.

The end product, though, is that it's now become even less possible to see where the Ministry of Finance ends and the BOJ begins than before 1998. "Weaknesses with regard to the personal independence of the BOJ and factors pertaining to Japan's political economy seem to continue to render the bank prone to political interference," argues Moritz Bälz, a Japan expert at Frankfurt's Johann Wolfgang Goethe University.

That interference may be about to intensify as Suga looks at the troubled economy he inherits as Covid-19 fallout intensifies.

For all the kudos being heaped Abe's way, it's important to recognize that gross domestic product is now back to 2012 levels - ie levels dating back to before his tenure. After nearly eight years of "reflating" the economy, wages and consumer prices are largely flat.

Abe relied too much on aggressive BOJ easing to stabilize growth and not enough on the structural reforms needed to jolt Japan's corporate sector into new life. So, here Japan is in 2020, with monetary and fiscal functions at in a state of symbiosis that will be hard to separate again.

Ben Bernanke saw this coming. Bernanke's pre-Fed-chairman claim to fame was his extensive autopsies of Japan's banking crisis and its subsequent "lost decade." In 2003, while he was a Fed policy board member, Bernanke gave speech in Tokyo, where he warned "the role of an independent central bank is different in inflationary and deflationary environments."