Analysis: New Bank of Japan chief faces credibility test after landing top job

Fri Mar 15, 2013 7:12am EDT
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By Leika Kihara

TOKYO (Reuters) - Japanese lawmakers paved the way on Friday for a new central bank governor whose plan to defeat deflation rests on the belief that pumping huge amounts of yen into the economy will convince the public to start spending now because prices will rise.

Critics say policies advocated by Haruhiko Kuroda, endorsed by parliament to lead the Bank of Japan, are a leap of faith. The BOJ has been pumping cash into the economy for years without ending nearly two decades of grinding deflation.

How will doing more of the same make a difference, their argument goes.

"There's no clear explanation from Kuroda yet on how and to what degree expanding the BOJ's balance sheet further could push up prices," said Hideo Kumano, a former central banker and now chief economist at Dai-ichi Life Research Institute.

Nearly two decades of low-grade deflation have entrenched the view in a generation of Japanese that prices steadily fall. By some measures the Bank of Japan is already the most aggressive in the industrialized world.

The main argument of Kuroda and Kikuo Iwata, confirmed on Friday as deputy governor, is that the central bank should change that mindset by being much more aggressive in expanding its balance sheet. In that way it will be able to reach a 2 percent inflation target in two years.

Indeed Iwata, suggests the target can be reached once excess bank reserves parked with the central bank reach 80 trillion yen.

BOJ forecasts suggest those reserves will surpass that amount this year, but that a key measure of consumer inflation will not even reach 1 percent, casting doubt on the new leaders' argument that once the BOJ starts ramping up the printing press, its 2 percent inflation target will be in sight.   Continued...

Bank of Japan (BOJ) governor Haruhiko Kuroda attends a hearings session at the upper house of the parliament in Tokyo March 11, 2013. REUTERS/Issei Kato