BOJ runs groupthink risk as board dissenters depart

Compliant board could leave cbank vulnerable to govt pressure to bankroll public debt

TOKYO, March 31, (RTRS): Bank of Japan (BOJ) Governor Haruhiko Kuroda will have a more compliant board when two upcoming vacancies are filled, which critics say could limit debate on his controversial policies and leave the bank vulnerable to government pressure to bankroll public debt.

As Kuroda signals his readiness to expand an already huge asset-buying programme or push interest rates deeper into negative territory, officials fear a homogeneous board could brush aside pitfalls such as market distortion, and the rising perils of an exit strategy.

The BOJ took the unprecedented step of setting negative interest rates in January, after nearly three years of printing money at a rate of up to 80 trillion yen ($710 billion) a year, in a bid to rescue his floundering efforts to lift Japan clear of two decades of deflation and stagnation.

His radical policies, which have had diminishing returns despite the scale of the money-printing, or quantitative easing (QE), have frequently only cleared the BOJ board — governor, two deputies and six people from academia, markets, banking and non-financial business — by the slimmest of margins.

“When monetary policy is pushing the limits, there needs to be substantial debate on the pros and cons of each step”, said one source familiar with the BOJ’s thinking. “For this to happen, it’s better to have a group with diverse ideas.”

Since appointing Kuroda as governor in 2013, Prime Minister Shinzo Abe has gradually reshaped the board more in favour of Kuroda’s loose-money policies.

Two swing voters were replaced by supporters of Kuroda’s policies last year, but he still only pushed through negative rates on a 5-4 vote.

The balance of the board will tip more in his favour in April when think-tank executive Makoto Sakurai, an advocate of reflationary policies, replaces academic Sayuri Shirai, who was among the four dissenters in January.

The government is also seen replacing Koji Ishida, a former commercial banker and another January dissenter, with an advocate of stimulus when his term ends in June, people familiar with the selection process say.

That leaves former market economists Takehiro Sato and Takahide Kiuchi as the only vocal opponents, though they too will leave the board in July next year.

Some say they fear a return to the pre1998 days when the BOJ had what insiders called a “sleeping board”, government had a decisive influence on policy, and members rubber-stamped plans drafted by BOJ bureaucrats and presented by the governor.

“The BOJ is a group of like-minded bureaucrats, and the board is one of the few channels in which it has interaction with the outside world,” said Hideo Kumano, a former BOJ official who is now chief economist at Dai-ichi Life Research Institute.

“Respecting the minority view and diversity in the board helps prevent the BOJ from going too extreme in a single direction,” he said.

There are lessons for Japan in the 1980s, when the board and governor yielded to political pressure and allowed an asset bubble to form by delaying monetary tightening.

After a law granting the BOJ independence from the government took effect in 1998, the board became the BOJ’s top decision-making body and often saw split votes. Dissenters sometimes teamed up to make counter-proposals, while several proposals by outliers later became official policy.

Some officials say a lack of debate on the risks of negative rates in January may have helped sow confusion over the policy, and that could get worse if there are fewer dissenters on the board.

The minutes of the negative rates meeting show scant sign that the board discussed how negative rates could affect financial institutions’ profits, or debated an alternative presented by bureaucrats, to top up QE. The BOJ declined to comment. “You can talk about abstract transmission channels using economic models. But what’s really needed is down-toearth debate on how businesses, banks and households are affected by each policy step,” said a former board member with close ties to incumbent central bank policymakers.

“Lacking that, a central bank loses credibility so easily.”