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 Kuroda, confident that the BOJ's massive monetary stimulus is
pulling Japan out of two decades of growth-sapping deflation, is
under no illusion that money-printing alone can underwrite a durable
recovery.
A long-time critic of the BOJ's past cautious approach to policy
making, Kuroda's bluntness has found a new target: Abe, who in 2013
hand-picked the Oxford-educated economist and former finance
ministry mandarin to recharge the economy.
Specifically, Kuroda is pressing for reforms that the prime minister
has promised in order to reverse the decline in prices which has
crimped growth, profits, investment and consumption since the late
1990s, say sources familiar with his thinking.
He wants Abe to walk the talk.
Last month Kuroda strayed from central bank territory into the
government's remit, telling a Tokyo audience that to revive Japan's
"animal spirits", the government must fix problems like labor
shortages that are growing acute as the economy recovers.
A week later Kuroda stressed that it was critical to have "efforts
beyond the realm of a central bank, like those undertaken by the
government and companies" to ensure growth in the medium to long
term.
Analysts say Kuroda's unusual candor comes with risks.
"He can say these things now because the economy is on track," said
Koichi Haji, chief economist at NLI Research Institute. "But there's
always a risk it will backfire and put him under heat, particularly
if inflation doesn't reach 2 percent."
The stakes are high. Abe's "growth strategy" is expected to be
unveiled around June 27.
Analysts say Kuroda's comments were probably timed to influence
discussions on the strategy, especially as supply constraints,
including a shrinking workforce and weak productivity, have surfaced
faster than the BOJ had anticipated.
If Abe's package fails to rev up Japan's paltry growth potential,
the recovery may falter. Worse still, if financial markets lose
faith that Tokyo will rein in the industrial world's heaviest public
debt burden, interest rates could spike, wrecking the recovery and
damaging the financial system.
FROM DEMAND TO SUPPLY
Japan's economy has gained speed over the past year thanks to the
first two arrows of rapid monetary expansion and fiscal stimulus,
with inflation reaching the half-way mark of the BOJ's goal of
achieving 2 percent inflation next year.
The BOJ chief does not think his mission is accomplished yet, but
people familiar with his thinking say he is already focusing on what
happens after he hits his price goal. [ID:nL3N0OB00A]
There is no guarantee of success, but Kuroda's push for the
government to deregulate the economy may have come at an opportune
time. Even some easy-money advocates close to Abe say the economy
now needs reform more than stimulus.
"As things stand now, only prices are rising while the growth rate
isn't rising," said a person close to the finance ministry.
"So we're heading into a situation nobody wants, where wages don't
rise - only prices do. It's natural for Mr Kuroda to stress the
importance of the supply side."
In Kuroda's Tokyo speech last month, he listed some economic
challenges: enhancing productivity, bringing more women and elderly
into the workforce, employing highly skilled foreigners and putting
public finances on a sustainable footing.
These are precisely the kinds of policies Abe has promised to tackle
with his 'third arrow' of reforms. On Friday, he unveiled a plan to
cut the corporate tax rate below 30 percent, in stages, to spur
growth. [ID:nL4N0OU1ZM]
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Yet, outlines of the "third arrow" policies and drafts seen by
Reuters offer only broad goals with few specifics. Previous reform
proposals have disappointed investors as vague and ineffective.
[ID:nL4N0OQ1LJ][ID:nL4N0OQ2B1][ID:nL4N0OT03B]
Kuroda kept up the pressure, telling a news conference on Friday
that the government has work to do. "The central bank ought to
achieve price stability and the government a domestic demand-driven
growth," he said.
The issue assumes an urgency for the central bank chief as the
ageing workforce shrinks and productivity ebbs.
"Simply ending deflation won't guarantee Japan will return to the
days of strong economic growth," said Hideo Hayakawa, a former top
BOJ economist who still commands attention in the central bank for
his analysis.
He said that if Abe doesn't carry through with reforms, Japan risks
falling into stagflation.
The BOJ reckons Japan's potential economic growth rate is less than
0.5 percent. The bank and government policy makers want to raise
that rate above 1 percent, though it would still lag well behind the
4 percent rates Japan clocked in the 1980s.
STICKING HIS NECK OUT
With public debt worth more than twice the size of the economy,
Kuroda worries that the bond market may finally face a reckoning for
decades of profligate spending, say the people familiar with his
thinking.
Abe's government can now borrow 10-year money at just 0.6 percent -
thanks largely to the BOJ's policy of buying most new government
bonds on offer - but market confidence is fragile.
A mere 1 percentage-point rise in interest rates would boost Japan's
debt-financing costs by 1.8 trillion yen ($18 billion) a year,
nearly quadruple the rise in tax revenues expected from stronger
economic growth, reckons Toshiki Tomita, an academic member of the
Finance Ministry's advisory panel.
For his part, Abe does not appear to be piling pressure on Kuroda to
do more by way of near-term stimulus, given the bank's policy is "on
track" and the job market is tightening faster than expected,
according to Kozo Yamamoto, a prominent reflationist adviser to Abe
in the premier's ruling party.
Whether Kuroda's arguments gain any traction with Abe is another
question. He has stuck his neck out. He is careful to say the BOJ
will ease further if the economy falters and his inflation target is
in jeopardy, but he has staked out a position that could prove hard
to retreat from.
(Additional reporting by Yoshifumi Takemoto and Yuko Yoshikawa;
Editing by William Mallard, Shri Navaratnam and Mark Bendeich)
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