‘Regime change’ at BoJ seen to boost confidence

A CHANGE of leadership at the Bank of Japan (BoJ) would offer a chance to bolster public confidence in its ability to defeat deflation, according to an economic adviser to Prime Minister Shinzo Abe.

“What’s important, especially this time, is whether we can undertake regime change,” Etsuro Honda said in a telephone interview on Friday. “It should be someone who is refreshing enough and can renew people’s impressions with personal charm and sincerity.”

Honda’s comments contrast with those he made in January, when he said reappointing BoJ Governor Haruhiko Kuroda, whose term ends in April next year, was an option, citing the importance of continuity at the central bank.

Honda declined to comment on potential candidates to replace Kuroda. He said he expects the selection process for BoJ leadership positions to start sometime this fall. The central bank’s two deputy governors’ terms end in March.

Honda, who is serving as ambassador to Switzerland, has been mentioned by private economists as a candidate for BoJ chief. He declined to comment on the possibility.

GROWING SPECULATION

With most economists forecasting no change to monetary policy this year, the question of who will serve as BoJ governor after Kuroda’s term ends is gaining more attention.

In a recent interview with Bloomberg, Nobuyuki Nahakara, a former BoJ board member and a mentor to Abe, said Kuroda should step down because new ideas were needed. Masahiro Kawai, an ally of the governor, said in a separate interview that Kuroda should serve for another term to finish what he started.

Kuroda was the candidate most frequently cited by economists in a Bloomberg survey last month. He has fended off questions about who will be governor after April by noting that it is a question for the government.

One thing that would disqualify potential candidates, Honda suggested, would be supporting another increase in the nation’s sales tax before the end of deflation was achieved. A similar tax hike in 2014 was widely blamed for derailing the economy. Honda said it also dashed expectations for Abenomics.

“If one doesn’t have a deep understanding of Abe’s strategy to overcome deflation, that person is absolutely not qualified,” he said.

Other qualities needed in a BoJ governor include consistent ideas on macroeconomic policies, a strong determination to fight deflation and the ability to communicate smoothly with the prime minister, overseas central bank chiefs and financial markets, he said.

A series of scandals and a resounding loss for his party in voting for the Tokyo assembly on Sunday have weakened Abe politically, but analysts expect him to remain prime minister at least until a party leadership contest in the autumn of next year.

Honda’s relationship with Abe goes back more than three decades, and the two communicate frequently. Honda was consulted on Abe’s choice of BoJ governor in 2013 as well as the board members appointed since then. Honda also successfully persuaded Abe to postpone a planned sale tax hike scheduled for 2015.

CONQUERING DEFLATION

There is no need for the BoJ to add stimulus now because inflationary pressures are rising due to a tight labor market and improving output gap, Honda said. The BoJ should keep its target for 10-year bond yields around 0% “as long as possible” until 2% inflation is stable, he said.

Honda said he has had to acknowledge that the BoJ faces a limit to its easing program, because it must consider the impact on financial stability, such as through profits at regional banks, a view he didn’t hold before the start of Abenomics in 2013.

What the economy needs now is supportive fiscal policy, which at the very least shouldn’t be tightened until deflation is defeated, Honda said. The government should make the most of the ultra-low interest rates created by monetary policy.

“It’s a fundamental principle that we keep fiscal policy expansionary to make it and monetary policy the two wheels of the economy,” Honda said.