BOJ STATE OF PLAY: New Board Members Replace Last Dissenters

By Max Sato

     TOKYO (MNI) - The Bank of Japan's two new board members - Hitoshi Suzuki

and Goshi Kataoka - began their five-year terms Monday, replacing the last

remaining dissenting voices on the central bank's policymaking panel.

     That means a tighter grip on monetary policy by Prime Minister Shinzo Abe,

who was returned to power in late 2012 with an election campaign promising to

overcome deflation and revitalize the economy.

     Unfortunately, the BOJ's 2% inflation target, which was advocated by Abe,

has not been met. Households are concerned about slow wage growth amid the

recent rise in the cost of living, and firms are cautious about raising prices

for fear of losing market share or denting consumption.

     Suzuki, aged 63, a commercial banker from the Bank of Tokyo-Mitsubishi UFJ

and Kataoka, 44, formerly an economist at Mitsubishi UFJ Research and

Consulting, are expected to support the reflationary policy stance of BOJ

Governor Haruhiko Kuroda.

     The two new board members are likely to support him in maintaining monetary

stimulus through yield curve control. The policy board is set to deliver

unanimous votes - something that has become rare in recent years.

     At a news conference Tuesday, Suzuki and Kataoka said they are fully

committed to achieving what many analysts see as an increasingly elusive 2%

inflation target, warning that it is premature to discuss how the bank might

eventually unwind its aggressive easing policy.

     Asked if they support Kuroda's reflationary policy stance, Suzuki said he

is "neutral." For his part, Kataoka said he is aware of his reputation as a

"reflationary" theorist but stressed that he would make policy judgement based

on "data and facts," not economic theories.

     Kataoka said policymakers must be open to changing economic climates and

other people's views. "Whether to use interest rates or quantity (asset

purchases) is based on the economic conditions at the time," he said.

     Kataoka would not be drawn on whether the BOJ may need to conduct

additional easing to guide near-zero inflation to a stable 2%. "I will try to

make an appropriate judgement based on economic conditions and the bank's

projections in its Outlook Report."

     Suzuki replied that he had his own personal views but had no comment on the

future course of BOJ easing policy.

     Asked whether inflation can be anchored around 2% during their five-year

terms, Kataoka said he does not know when it can be achieved but he would "make

efforts" to do so. Suzuki said, "I personally think it (2%) is a high target."

     The two incomers replace Takehiro Sato, 55, and Takahide Kiuchi, 53, both

former private-sector economists, who were well-known skeptics of aggressive

monetary easing. They maintained their opposition to the yield curve control

policy target and the large scale of some of the bank's asset purchases, citing

the side effects on financial intermediation.

     The nine-member BOJ policymaking panel adopted an explicit 2% inflation

target in January 2013 under political pressure and began aggressive monetary

easing three months later under the then new and reflationary-minded Governor

Kuroda.

     At its latest policy meeting on July 19-20, the BOJ board decided to leave

its monetary policy unchanged in a seven-to-two vote, retaining the yield curve

control target it adopted in September last year, while pushing back its

estimate for achieving its 2% inflation target by a year until "around fiscal

2019." It was the sixth delay since April 2013 when the bank launched aggressive

easing.

     In its quarterly Outlook Report, the BOJ board continued to revise up

slightly its economic growth forecast for the next two years on firmer global

demand but revised down its projection for inflation through fiscal 2019 as the

pace of increases in wages and retail prices remains slow.

     Sato and Kiuchi told the meeting that the BOJ's new CPI projections were

still too optimistic, while Kuroda told reporters that he remained confident the

central bank's current stimulative monetary policy stance would lead the economy

toward a balanced 2% rise in inflation by influencing the public's price

outlook.

     Companies are hiring mainly part-time workers to cope with labor shortages

and capping wage hikes by investing in equipment designed to make their

operations more efficient with fewer workers, Kuroda said.

     In the service sector, firms are absorbing higher labor costs by changing

the services they offer, he pointed out. "But this cannot last forever," Kuroda

maintained. "The attitude among businesses and households toward raising wages

and prices will become assertive.

     Sato and Kiuchi were the last BOJ board members appointed by the previous

government led by the Democratic Party, which ruled Japan for about three years

until it lost in Lower House elections in December 2012 to the Liberal

Democratic Party under Abe. The departure of Sato and Kiuchi suggests the

board's debate on the side-effects of aggressive monetary easing may crumble and

the perceived need to prepare for an eventual exit from it may be diminished.

     BOJ officials believe the new board members are unlikely to affect the

direction of the current easing policy since debates and decisions will be

dominated by Governor Kuroda, 72, and his two deputies, Kikuo Iwata, 74, a

former economics professor, and Hiroshi Nakaso, 63, a career central banker with

experience in financial stability oversight and international coordination. Both

of Iwata and Nakaso have supported the governor's policy stance.

     But the five-year terms of the top three BOJ officials will end early next

year: April 8 for the governor and March 19 for the deputy governors. Abe may

choose to reappoint Kuroda, but the political landscape has changed so

dramatically in the past few weeks that the embattled prime minister may now

have to worry about his own job.

     The ruling Liberal Democratic Party, mired in political scandals, suffered

another setback on Sunday when it lost a key mayoral election following a

crushing defeat in Tokyo metropolitan assembly elections earlier this month.

     Newspaper polls show public support for the cabinet of Prime Minister Abe

continues to slide due to its handling of the scandals, casting doubt over his

leadership ahead of parliamentary elections expected next year.

     But angry voters do not see a strong alternative to the ruling coalition.

     The leader of Japan's main opposition Democratic Party said Thursday she

was stepping down over fading support from voters and party members, sharply

reducing the chances that the opposition camp will be able to take advantage of

plunging approval ratings of the scandals-hit cabinet.

     Her decision followed the resignation of party secretary-general Yoshihiko

Noda Tuesday following the party's defeat in Tokyo assembly elections earlier

this month. Without its top two leaders, the Democratic Party's ability to mount

effective opposition to the Abe government are particularly dim.

     Prime Minister Abe's critics have said he has been too arrogant in

policymaking at the national level -- resorting to rushed voting on

controversial bills -- on the back of the majority the governing coalition holds

in both chambers of parliament. But so far opposition forces in the Diet have

not been able to capitalize on the political scandals that surround Abe.

     At this point, Abe is unlikely to dissolve the Lower House and call a snap

election because the tide is running against him and the LDP.

     When the next Lower House election takes place, before mid-December 2018,

the LDP may lose some seats but the ruling coalition is unlikely to lose a

majority unless a popular and powerful figure like Tokyo Governor Yuriko Koike

decides to enter national politics and field joint candidates with opposition

parties, forming an anti-LDP grand coalition.

     During the three years when it was in power at the national level until

losing to the LDP in late 2013, the Democratic Party failed to implement

growth-oriented structural reforms, instead placing too much focus on cutting

"wasteful" spending. It also alienated bureaucrats by making controversial

political decisions and mishandled some political issues, including how to

reduce the large presence of U.S. forces on the southern island of Okinawa, the

site of fierce battles in the closing days of World War II.

     The Democratic Party imploded amid political infighting and the ill-fated

decision by the then prime minister Yoshihiko Noda to dissolve the Lower House

and call a snap election in late 2012, in which the party suffered a severe loss

and allowed the LDP and its leader Abe to return to power.

     Until recently Abe was seen leading the LDP to another easy victory in the

next Lower House election that must be called by mid-December next year but it

is now uncertain whether Abe will ride out the continuing slump in public

support and be reelected for an unprecedented third term as party chief, and

thus prime minister, in September next year.

     On Friday, Defense Minister Tomomi Inada resigned over a ministry cover-up

of daily activity logs on peacekeeping operations in South Sudan but denied that

she was directly involved. 

     In another scandal, opposition parties have charged that Abe showed

favoritism to a close friend over plans to open a veterinary faculty in a

special deregulation zone as part of the government's growth strategy.

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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