Positive Deflation Fighter

“Japan economy was injured to heal up in three years,” told the former Prime Minister Takeo Fukuda after it get through “oil shock” in 1970s. The nominee for next governor of the Bank of Japan, Haruhiko Kuroda, on Monday declared that he intended to achieve 2% inflation target in next two years. Welcoming his announcement, Tokyo stock market marked a consecutive rally and yen declined against US dollar in the foreign exchange. With no efficient policy of raising labor wage, Japan is elevated to the higher place, where the impact of steep down will be fatal.

Kuroda has been known as a sharp critic against the policy of BoJ. In the testimony at a committee in the House of Representatives on Monday, he insisted that it had been highly unusual in the world for Japanese economy to suffer from fifteen-year long slump of deflation, and it was the central bank to be responsible for getting rid of deflation and stabilizing commodity prices. The new two-year target made clear contrast with the retiring governor, Masaaki Shirakawa, who had been reluctant to set the timeline of inflation.

It will be preferable for the government of Japan to show a cooperative situation between the executive office and the central bank in monetary policy. In that meaning, Kuroda is a better figure for the government than Shirakawa. Kuroda, as a longtime bureaucrat in the Ministry of Finance, has been better accustomed to handling politics than a lifetime BoJ banker Shirakawa is. As the most likely figure for next governor, Kuroda emphasized his closeness to Abe administration.

Another reason of positive response of market was the expectation of political stability on the nomination. The Democratic Party of Japan announced its intention not to reject Kuroda in the approval voting. With the cooperation of major opposite party, Kuroda will be approved as the governor next week. DPJ actually lost its cause to oppose Kuroda nomination in this preferable response from the market.

However, it is unclear that new BoJ policy will work. Kuroda showed positive attitude to buy more national bonds and various financial assets for increasing the money flow. But his policy embraces a risk of devaluation of assets BoJ has bought. It also is possible that commodity price will stay low level even though BoJ provide with a plenty of money.

The policy of BoJ is naturally inclined only to supply side. It is the political job to raise workers’ wage. But new tax for reconstruction from the great earthquake two years ago and raising the rate of consumption tax starting next year may weaken their purchasing power. Companies may keep their internal reserve until economical recovery would be confirmed. Complaint of consumers then may cause another political turmoil.