Bank of Japan Governor Haruhiko Kuroda appears more determined than ever to weather political and market pressure in pursuit of sustainable inflation.
With just months remaining of his decade-long mission to push up price gains to a consistent rate of 2%, Kuroda is in no mood to give up on stimulus and jeopardize his legacy now, according to people familiar with the matter. BOJ officials see some potential green shoots of sustainable inflation that need encouragement not elimination.
That leaves the BOJ alone among major central banks in trying to hold rates near zero and cap bond yields, stimulus Kuroda sees as needed for an economy that’s smaller than it was before the pandemic. The BOJ spent a record $115 billion defending yields last month as traders bet it may have to scrap the policy given the yen’s slide to a 24-year low, which is driving up the cost of fuel and staples like soy sauce and sushi.
Yet economists warn that any policy tweaks or signal of softening resolve by the central bank will only encourage more speculation of further change to come. In line with a Bloomberg survey, the takeaway is that even with the yen’s weakness and inflation already in the targeted 2% range, the BOJ will stand firm when it announces its policy decision on Thursday.
Hours later, the BOJ’s status as the world’s dovish outlier is set to be showcased, with the European Central Bank poised for its first hike in more than a decade. Like the yen, the euro has bombed against the dollar as the Federal Reserve’s rate trajectory steepens.
While the shocking murder of former premier Shinzo Abe has deprived Kuroda of one of his key backers in the ruling party, the strong election victory of current Prime Minister Fumio Kishida has bought more time for continued policy coordination between the government and the central bank.
In the election, voters were offered few realistic alternatives to the government’s policy stance and opted to support Kishida’s approach of subsidizing key prices to lessen the pocket-book pain of inflation. Gasoline subsidies are keeping prices at the pump around 20% below where they would be otherwise and more subsidies and help are likely on the way.
At the same time, rock-bottom interest rates enable the economy with the developed world’s largest public debt load to keep its borrowing affordable. But this cozy arrangement could break down if the yen keeps heading south.