Analysis-Weak Yen Pulling Japan Away From BOJ Kuroda's Radicalism

A decade ago, Bank of Japan Governor Haruhiko Kuroda won praise for ending a debilitating spike in the yen with his "bazooka" stimulus.

Now the currency's slide is putting him under siege and forcing him to reluctantly concede that once he leaves next April, the bank may start relaxing its policy that caps bond yields.

True to his dovish streak, Kuroda told a briefing last week the BOJ's guidance to keep policy rates at "current or lower levels" won't change for about two to three years - well beyond the end of his second, five-year term in April.

The remark triggered a sharp yen fall to near 146 to the dollar, from around 144, forcing the government to intervene to prop up the currency for the first time in 24 years.

Four days later, Kuroda retracted the comment and said the guidance won't last that long, and could change if the economy fully emerges from the COVID-19 pandemic's pain.

"In terms of the BOJ's communication policy, it was a failure," said veteran BOJ watcher Mari Iwashita. "It's hard denying that Kuroda's slip of tongue pushed the yen below 145."

The episode underscores a shift in public mood that now sees years of ultra-low rates as less favourable. It also keeps alive the chance the BOJ will tweak its dovish guidance once Kuroda departs.

"The world is all about inflation and the BOJ will have a new governor," said a source familiar with the bank's thinking. "A leadership change opens up opportunities for a policy shift."

On the surface, the division of labour is clear: The government will use intervention to arrest "excessive" volatility, while the BOJ will keep rates ultra-low to support the economy.

But the fact the government intervened shortly after Kuroda's yen-weakening comments highlights the uneasy relationship between the two, some analysts say.

"The government clearly wants to reverse a weak-yen trend it sees as bad for the economy. The BOJ's policy runs counter to this goal," said former BOJ board member Takahide Kiuchi.

"The timing of intervention looks as if the government had to step in because the BOJ did nothing to tame yen falls," he said. "It's a relationship not going well, or even broken."

So far, Prime Minister Fumio Kishida's administration has held off on piling explicit pressure on the BOJ, with the view that ending low rates prematurely could cause a recession and inflate the cost of funding Japan's huge debt. By law, the government cannot remove a BOJ governor from his post.

But public frustration over the weak yen and rising prices has hurt Kishida's approval ratings, drawing grumbling from some officials over Kuroda's stubbornly dovish stance.

"His comment signalling that interest rates won't rise for two to three years was unnecessary," said one government official. "That's not his call to make in the first place."

Domestic media is becoming more aggressive in criticising Kuroda for allowing the yen to fall, which is boosting import prices and increasing the cost of living.

"It's time the BOJ review its guidance favouring additional easing, which is inconsistent with the fact inflation has topped its 2% target," the daily Asahi Shimbun wrote on Saturday.

The usually cool-headed Kuroda raised his voice in anger at Thursday's briefing when a reporter criticised his stimulus for eroding the yen's value and leaving households worse off.

"Your comments aren't based on facts," he said, defending his stimulus as having ended deflation and created jobs.

CHANGING BOARD COMPOSITION

For now, Kuroda has the backing of his board, which voted unanimously to keep policy steady this month. But Kishida filled two openings in July with less-dovish newcomers, shifting the board's composition away from Kuroda's radicalism.

Former bond strategist Hajime Takata, who replaced dovish board member Goushi Kataoka, stressed the need to be mindful of the cost of prolonged easing. Another newcomer said the BOJ could debate an exit from easy policy once wages begin to rise.

BOJ Deputy Governor Masayoshi Amamiya, a top candidate to succeed Kuroda, has said the bank was "always brainstorming tools" for when it ends easy policy.

In a rare move, the BOJ's monetary affairs division hosted a series of workshops with private academics to debate Japan's inflation outlook. Such discussions, as well as various research the BOJ regularly publishes on monetary tools, tend to lay the theoretical groundwork for a policy shift, said two sources familiar with the bank's thinking.

With no clarity on who Kishida will pick as governor, BOJ staff has yet to lay out a new strategy for their new boss. But if they feel the leadership transition could bring big changes to the existing policy framework, they will draft possible scenarios for the shift or ideas on changing communication about six months in advance, they said.

"There's room to reconsider some of the dovish commitments that reflationist-minded policymakers cared about," one of the sources said. One of them, deputy governor Masazumi Wakatabe, will see his term end in March.

Critics are calling for reviewing the BOJ's complex framework which combines huge asset buying under quantitative and qualitative easing (QQE) with yield curve control (YCC), under which it sets a negative short-term rate target and a 0% cap on bond yields.

Rising global yields, fuelled by aggressive rate hikes in many countries, have forced the BOJ to offer to buy unlimited amount of bonds to defend the bond cap.

The yen's slide, driven by the BOJ's status as the world's sole central bank keeping negative rates, may add imminency to the debate over the feasibility of maintaining YCC.

"Investors who think YCC is unsustainable would keep attacking the yield cap. Those who feel the BOJ will successfully maintain YCC can safely keep selling yen," said former BOJ executive Shigenori Shiratsuka.

"There are limits to how long the BOJ can keep doing QQE and YCC," he said. "I think BOJ officials understands this."