As bitcoin spills credibility all over the globe, Japan’s Haruhiko Kuroda is saying “hold my beer.”
On Friday, with the eyes of the financial world fixed on a hemorrhaging yen, Bank of Japan Governor Kuroda did—nothing. Not the slightest move to plug holes in a yen down 16% this year. Not the smallest hint that the central bank is on top of things. Maddeningly little in the way of guidance for traders determined to drive the yen to 150 to the dollar.
It was an oddly detached performance by a respected economist hired nine years ago to restore trust in Japan’s economy.
Kuroda, after all, got the top BOJ job in 2013 to end Japan’s deflation nightmare once and for all. His predecessors from the 1990s and 2000s spent years refilling the proverbial monetary punchbowl again and again. When Kuroda came along, he supersized the bowl, added a series of new ingredients and slapped an “open 24/7” sign on BOJ headquarters.
Things didn’t go to plan. Early on from 2013 to 2019, Kuroda’s aggressive easing pumped up gross domestic products and stock prices here and there. But the virtuous cycle of wage gains that lead to increased consumption and inflation never materialized.
Then came Covid-19 in 2000, the supply-chain chaos of 2021 and Russia’s invasion of Ukraine. The cumulative effects of these events meant that Kuroda’s team is finally getting 2% inflation—and it couldn’t be less happy about it.
Japan’s inflation is the “bad” kind. It doesn’t derive from organic increases in demand. Rather, Japan is importing inflation thanks to buying commodities at elevated prices with a falling currency. The yen’s drop to the 135 level, the weakest in 20 years, should tell Kuroda’s team all its needs to know about why Friday’s policy meeting was so pivotal. And why its inaction means the yen is now competing with bitcoin in a race to the bottom.
Granted, the BOJ is in a terrible position, roughly two decades after it pioneered quantitative easing. Kuroda’s predecessors first slashed interest rates to zero in 1999. In 2000 and 2001, it devised and implemented QE. When Kuroda was hired in 2013, his mandate was to turbocharge the BOJ’s assault on deflation.
Kuroda set out to corner the bond and stock markets and buy up whatever assets made sense to attempt to pump support into the economy. By 2018, that hoarding increased the BOJ’s balance sheet to a size bigger than Japan’s annual GDP.
Essentially, Kuroda’s institution is trapped. If it stops buying assets, markets could panic. If he goes further to add liquidity, Kuroda risks accelerating the yen’s decline. Kuroda took door No. 3: pretending nothing’s going on with the yen that seems in a contest with bitcoin to see which is a more pathetic store of value.
“Funny, that Tokyo has wanted to become a crypto-trading center, but the yen is looking plenty bitcoin-ish all its own,” quips one Hong Kong-based currency analyst.
Kuroda may have chosen the worst option of the three. Sure, as Moody’s Analytics economist Stefan Angrick points out, the BOJ on Friday added a “rare reference” to foreign exchange risk. Generally, though, Angrick notes, “it otherwise maintained the tone of prior communications.” Bottom line, he says, “Kuroda refused to blink.”
But did he also suggest to world markets that the BOJ, circa 2022, lacks a pulse? For one thing, the BOJ’s confidence that upward price pressure from higher energy costs will fade sure has a disturbingly 2021 vibe. It sounds suspiciously like the inflation-is-transitory argument that got the Jerome Powell-led Federal Reserve in such trouble in 2022.
What’s needed is proof of life in Tokyo policymaking circles. Friday was Kuroda’s chance to remind yen bears that the BOJ has a plan for Japanese financial stability. That traders should be careful about trying the patience of BOJ and Ministry of Finance officials. It also was a chance for Kuroda to regain some clout in global markets.
Central banking, remember, is a confidence game. When the BOJ cuts rates, it needs bankers and investors to act boldly on that move. It’s called the “multiplier effect.” That explains why Kuroda even conjures Peter Pan for dramatic effect from time to time to spin consumers to spend more.
The BOJ’s inaction Friday risks communicating to markets that all the magic is gone from the Kuroda era. Many assumed that to be the case long ago. Japan’s central bank has been largely on autopilot for a few years. And, it seems, out of magic.