The Japanese prime minister and central bank governor have co-operated so closely over the last two years that their relationship is routinely likened to a three-legged race. Bound at the ankles and moving in sync, they have hustled toward their declared goal of ending economic stagnation.
The Governor of the Bank of Japan (BoJ), Haruhiko Kuroda, has taken such an outsize role in efforts to promote growth that some commentators slyly refer to Tokyo's stimulus initiatives as "Kurodanomics".
The description of Kuroda as the driving force behind Japan's economic policy - known more commonly as Abenomics, after Prime Minister Shinzo Abe - seemed apt last month, when he pledged to inject even more central bank money into the economy.
Yet the partners suddenly look out of step. Abe announced on Tuesday that he would postpone a planned tax increase that Kuroda had long supported. Higher taxes are vital to taming Japan's national debt, Kuroda argues, and some are calling Abe's reversal a stab in the back.
"Prime Minister Abe has betrayed Kuroda and the Bank of Japan and chosen victory over scruples," Soichiro Tahara, a prominent political commentator and journalist, wrote on Wednesday in a piece posted on the website of the Asahi Weekly magazine. In addition to delaying the second and final phase of the tax increase by a year and a half, to April 2017, Abe called a snap election for next month. Analysts believe his Liberal Democratic Party will win.
Kuroda had lobbied hard for Abe to follow a long-agreed-to timetable to increase the national sales tax, which was meant to double to 10 per cent, with the first step coming last April and the second next October. Many saw an implicit deal: Kuroda would print more money, supporting the economy, and Abe would raise taxes and tackle the debt.
"Fiscal discipline is the responsibility of the government and Parliament, not the central bank," Kuroda said at a news conference on Wednesday, seeking to dispel talk of a rift. Asked if he thought delaying the tax increase would have the intended effect of encouraging growth and inflation, he added, "There's no point going into my personal views."
Kuroda was speaking after the central bank's policy committee voted to leave its monetary settings unchanged. The decision was universally expected, after a surprise move the last time the committee met, on October 31, when it approved a proposal by Kuroda to spend trillions of more yen on government bonds and other assets. The initiative is intended to keep borrowing costs low and encourage spending and investment.
Masamichi Adachi, a former central bank official who is now an economist at JPMorgan Chase, said it was inevitable that Abe's wishes would prevail in any policy rift. "Some people regarded it as a coalition, and in that sense he's lost standing," he said of Kuroda. "But he totally understands he's under Abe, not an equal. At the end of the day, the BoJ has no independence from the Abe administration."
Kuroda was appointed the Bank of Japan's governor by Abe last year. Before that, he built his career at the Ministry of Finance, which has pushed for years to have the sales tax raised. With government revenue constrained by weak growth and deflation, Japan's debt has grown to the equivalent of two and a half years of economic output, by far the highest in the developed world.
Within the ministry, Kuroda was known as an advocate of aggressive stimulus measures, something that set him apart from more cautious colleagues. Yet compared with others in Abe's inner circle, which includes proponents of all-out government spending financed by the central bank, he has been a relative budget hawk.
"Maybe it's because he still carries some finance ministry DNA, but he's aware that if the government loses all financial constraint, there's a risk of a bond-market plunge," said a former finance ministry official, who spoke on the condition of anonymity to avoid antagonising his former colleague.
Kuroda said on Wednesday that the economy was still fundamentally on a path to growth, despite data on Monday that showed that Japan slipped into recession in the third quarter.
Gross domestic product contracted at an annualised rate of 1.6 per cent, the data showed. That followed a 7.3 per cent plunge in the previous quarter, after the first stage of the sales tax increase. The blow to consumer spending from the increase led to the recession and persuaded Abe to delay the second phase.
Kuroda now appears to be focused on holding Abe to a pledge to stick to the new 2017 timetable no matter what obstacles the economy throws up. The plan is to balance the budget, excluding interest payments on the debt, by 2020. Many economists say that is unrealistic, but Kuroda said on Wednesday that it was crucial to try.
"The government has laid out a medium-term fiscal consolidation plan and has set a clear target," he said. "I hope the government follows this plan diligently and creates a sustainable fiscal structure."
© 2014 The New York Times
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