Kuroda Buffets Yen a Final Time After a Decade of Radical Easing

(Bloomberg) — Haruhiko Kuroda finished his last meeting at the helm of the Bank of Japan by buffeting markets again with a straightforward stand-pat that contrasted with the explosive launch of his massive stimulus program a decade ago.

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The BOJ left its negative interest rate and its cap on government debt yields untouched Friday at the shortest regular meeting during Kuroda’s watch, as it stuck to its view that inflation at more than twice its 2% target level still isn’t sustainable.

The yen weakened as much as 0.6% before paring the drop to trade around 136.30 per dollar. The yield on 10-year government debt fell more than 11 basis points to as low as 0.385%, compared with the BOJ’s yield cap of 0.50% as bets on policy change were pared back for now.

The decision came shortly after parliament formally approved Kazuo Ueda to succeed Kuroda in April. Ueda will face the challenge of how to manage a stimulus program showing signs of strain, and how to pare it back without jolting markets should the central bank under his leadership judge that its inflation target has finally been achieved.

While the strongest price growth in more than four decades suggests Kuroda has dragged the economy out of the doldrums of deflation as he was tasked to do back in 2013, economists are sharply split on whether his record-breaking stint at the central bank has been a success or a failure.

“I would say Kuroda passed his mid-term exam by correcting a strong yen, boosting stocks and generating a sense that something might change among ordinary people in the first years of his term,” said Kyohei Morita, chief Japan economist at Nomura Securities. “But for the final exam of achieving the inflation target, boosting growth and maintaining financial stability, I can’t give him a passing grade.”

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A Bloomberg poll conducted this month shows the outgoing governor scraped a pass mark of 60% from BOJ watchers for his time at the bank. A breakdown of the results indicated that 56% assessed his decade of unprecedented stimulus as a success, while 44% said it was a failure.

Kuroda had aimed to do what no other governor had done before him by sparking 2% inflation in two years via a shock-and-awe splurge of asset buying that would change the behavior and expectations of companies, consumers and investors.

But ultimately he showed that central bankers don’t have a superpower that can spontaneously ignite inflation in isolation. Instead, Kuroda showed that an economy and its companies can benefit from a sharply weaker currency. Rock-bottom interest rates also helped keep borrowing costs down for a government that kept spending.

Even Kuroda himself has acknowledged that the hot prices seen now have more to do with inflationary factors overseas than the virtuous cycle of growth he tried to engineer.

“His success is based on his reversal of an excessively strong yen,” said Takashi Shiono, head of Japan economic research at Credit Suisse Group. On the other hand, “the BOJ took on too much of a burden by itself” to achieve a stable price target, a goal that also requires major support from the government and businesses, he said.

Kuroda’s critics flag the enormous cost of achieving what they see as meager gains. The BOJ’s massive asset purchases outsize the entire economy and has left a huge footprint that distorted bond and equity markets.

The BOJ’s 2016 switch from targeting a quantity of bonds to controlling interest rates and the yield curve enabled it to pare back its purchases when conditions allowed. But the central bank still became the biggest owner of Japanese government bonds and then stocks.

That invited criticism that the stimulus program was more about financing government spending and propping up the stock market than generating inflation or supporting the economy.

Speaking at his last post-decision press briefing on Friday, Kuroda defended his record. While not achieving stable inflation was “regrettable,” he said his stimulus program had pulled Japan out of deflation, improved corporate profits and the prospects for wage gains while creating millions of jobs.

He played down the size of the role his policy played in the growth strategy of former premier Shinzo Abe.

“The three arrows of Abenomics — monetary easing, flexible fiscal management and growth measures — were carried out together. I don’t think there was an excessive reliance on monetary policy,” Kuroda said.

Still, the future of the BOJ’s stimulus program has been under an intense spotlight over the past year. The global economy’s emergence from the pandemic, Russia’s invasion of Ukraine and a sharp pivot toward tighter policy in the US and other economies, contributed to a burst in global inflation, a worldwide bond rout and a plunge in the yen to a three-decade low.

The Japanese government’s intervention in currency markets last year to strengthen the yen as its own central bank contributed to its weakness crystallized for some observers the contradictions and lack of sustainability of the program.

Aware of the collapse of the Reserve Bank of Australia’s own version of yield curve control, speculators have been betting on the demise of the program.

Wary of criticism that the central bank gave up on stimulus too quickly in the past or acted too cautiously, Kuroda has held his ground. He has insisted that much stronger wage growth is needed to ensure inflation sticks in Japan even as many members of the public again question why the bank is intent on pushing up prices that squeeze household finances.

Since the start of this year, the BOJ has bought close to 40 trillion yen ($293 billion) in bonds to protect its 0.5% cap on yields and its control of the yield curve against speculation. That has added to the BOJ’s stockpile of assets, adding to the challenges Ueda faces.

Asked about the massive accumulation of bond and stock fund holdings during his term, Kuroda said he had no misgivings.

“I have absolutely no regrets there, and I don’t think I’m leaving behind a negative legacy,” he said.

Still, yields remain distorted and liquidity problems continue in the bond market. Both are issues the central bank tried to address with its surprise tweaks in December.

“Kuroda tarnished his last lap at the BOJ by stubbornly clinging to easing despite rising inflation momentum and triggering an excessively weak yen,” said Hiroshi Namioka, chief strategist at T&D Asset Management Co Ltd. “He probably should have listened a little more to the public.”

–With assistance from Erica Yokoyama, Yoshiaki Nohara, Kathleen Hays, Yuko Takeo, Keiko Ujikane and Ritsuko Ando.

(Adds comments from economists and from Kuroda’s final post-decision press briefing)

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