Bloomberg News

Shirakawa BOJ Expansion Gets No Respect as Stocks Cheer Exit

March 08, 2013

Bank of Japan Outgoing Governor Masaaki Shirakawa

Masaaki Shirakawa, outgoing governor of the Bank of Japan. Photographer: Kiyoshi Ota/Bloomberg

Governor Masaaki Shirakawa expanded the Bank of Japan’s assets by 50 percent, introduced an inflation target and safeguarded his nation’s banking system from shocks. Yet when he announced he was leaving three weeks early, stocks soared to a four-year high.

Shirakawa, 63, left policy unchanged at his final meeting yesterday ahead of his March 19 exit. Investors are focused on changes his nominated successor, Haruhiko Kuroda, may enact, with the Nikkei 225 Stock Average (NKY) rising more than 40 percent since mid-November in anticipation of more aggressive stimulus.

The reaction reflects Shirakawa’s failure to end deflation in a five-year term marred by three recessions, leaving the economy smaller now than when he took office. Outpaced in quantitative easing by Federal Reserve Chairman Ben Bernanke and the European Central Bank, Shirakawa’s warnings about the dangers of excess liquidity undermined the stimulus he put in place, according to former BOJ board member Atsushi Mizuno.

“Shirakawa did a great job in securing the financial system against shocks,” Mizuno, vice chairman at Credit Suisse AG in Tokyo and a member of the policy board from 2004 to 2009, said in an interview this week. “But the way he communicated reduced the impact of easing -- too much explanation of the side-effects with an unhappy face, while Bernanke looked confident whenever he added stimulus.”

Nomura Holdings Inc. and Mizuho Securities Co. say more easing could come as soon as the first meeting under the new leadership on April 3-4. A report today showed the economy returned to growth in the fourth quarter.

JGB Bubble

The risks of more aggressive easing include triggering a bubble in government bonds, Mizuno said. The yield on 10-year debt this week fell as low as 0.585 percent, the least since 2003.

“While it may be true that Shirakawa should have communicated more clearly, the financial system is flooded with liquidity thanks to the BOJ,” said Richard Koo, chief economist at the Nomura Research Institute in Tokyo. “The new regime seems to want to ease very aggressively, and who knows, it may end up destroying trust in the Bank of Japan. (8301)”

Shirakawa, a career BOJ bureaucrat who trained in economics at the University of Chicago, wasn’t supposed to become governor. Originally picked for deputy, he was a compromise after two candidates failed to get parliamentary approval.

At a press conference on April 9, 2008, his first day on the job, Shirakawa warned that too much short-term stimulus could hurt long-term growth. At a press conference yesterday, he said the government and BOJ need to have discipline.

Financial Crisis

Within his first six months, the native of Fukuoka in southern Japan faced the worst financial crisis in his lifetime as the collapse of Lehman Brothers Holdings Inc. froze global credit markets. Shirakawa injected liquidity and expanded asset purchases, shielding the financial system as the economy shrank and the yen rose about 20 percent against the dollar in four months.

“We were able to maintain financial stability even after the economy worsened following the Lehman shock,” BOJ Executive Director Hiroshi Nakaso, one of Prime Minister Shinzo Abe’s nominees for deputy governor under Kuroda, said this week in Parliament. “I think that deserves recognition.’”

A natural disaster prompted Shirakawa’s second big rescue effort, with the BOJ pouring a record 15 trillion yen ($160 billion) into the economy three days after the earthquake and tsunami in March 2011.

His failure to impress investors came even as he tried to improve transparency and communication at the central bank. The BOJ offered its first English-language press briefings, started giving its view on risks for the economy and introduced an inflation goal.

Asset Buying

“Shirakawa never sounded like a convincing reflationist,” said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. in Tokyo and a former BOJ official.

Overall, Shirakawa oversaw a 50 percent increase in the BOJ’s balance sheet. Including 30 trillion yen in bonds and other assets to be bought this year, he is the most aggressive governor since at least 1982, according to Bloomberg calculations based on BOJ data. He may have been the boldest in the BOJ’s 130-year history, according to Kenji Yumoto, vice chairman at the Japan Research Institute in Tokyo, who worked with Shirakawa on a government economic panel through 2009.

Still, Japan’s easing lagged behind other central banks, with the Fed’s balance sheet expanding by about 250 percent and the European Central Bank’s doubling in size during Shirakawa’s term. The imbalance put pressure on the yen to appreciate, hurting exporters, with the currency rising to a record high of 75.35 yen per dollar in October 2011.

Not Shoboi

Shirakawa bristled at unfavorable comparisons with the Fed, chiding a reporter in 2011 for characterizing the BOJ’s efforts as “shoboi,” meaning lame or shabby.

“I want to strongly say that none of the policy board members, including me, think it’s shoboi,” Shirakawa said at a press conference in March of that year. He also repeatedly stressed that the BOJ’s balance sheet, currently at 163.5 trillion yen, is larger than the Fed’s as a share of the economy.

His efforts were unable to stem a slide in corporate profits. Companies in the Nikkei index showed a more than 50 percent decline in aggregate net income in the four years through 2012, according to data compiled by Bloomberg. Sony Corp. hasn’t made a profit in four years.

Political pressure on the BOJ to revive growth also increased, as a public debt at twice the size of the economy limited room for fiscal maneuver.

Political Pressure

The governor was hauled in front of lawmakers repeatedly - -29 days last year -- while a movement in the Diet emerged to change the law governing the BOJ. Reflationists started getting the ear of senior politicians.

All the while, Shirakawa was warning against the dangers of too much liquidity and asset bubbles, in conflict with the objective of ending deflation. A gauge of consumer prices excluding fresh food fell in about two thirds of his 60 months in office.

Former Bank of England board member Adam Posen said in an interview last month that the BOJ’s “passive aggressive” policies over the last decade contributed to prolonged deflation.

Shirakawa declined to comment through a spokesman for this article. At a press briefing yesterday, he declined to comment on questions related to his tenure.

The six remaining board members will rate the performances of Shirakawa and his deputies to determine their leaving bonuses, according to the BOJ. The outgoing BOJ chief could get as much as 29.6 million yen or as little as nothing, depending on how he is rated.

Weakening Yen

The pressure increased toward the end of 2012 even as the BOJ expanded asset purchases twice in two months through October. Then-opposition leader Shinzo Abe began to call for unlimited easing to end deflation, a platform that helped return his party to power in December and drove the yen down more than 16 percent against the dollar since mid-November.

Shirakawa pushed back, calling for respect for the BOJ’s independence.

“The BOJ is doing its utmost to conduct appropriate monetary policy,” he told reporters on Nov. 20, saying that unlimited money-printing could worsen the national debt.

Two months later, he capitulated. The central bank adopted the 2 percent inflation target advocated by Abe and said it would start open-ended asset purchases in 2014.

Kuroda’s View

Kuroda, by contrast, has for years advocated quantitative easing to end deflation and said this week the BOJ will do whatever is needed to end years of falling prices if he’s confirmed as governor. He said in an interview last month that the BOJ could purchase the equivalent of trillions of dollars of assets to expand its balance sheet.

For now, investors and some businesses are looking ahead with optimism. Investors are the most bullish on Japan in more than three years, according to a January poll of investors, analysts and traders who are Bloomberg subscribers.

The economy grew an annualized 0.2 percent in the last three months of 2012, revised up from a 0.4 percent contraction, according to a Cabinet Office release today. Gross domestic product fell in the second and third quarters of 2012, meeting the technical definition of a recession.

Companies from Toyota Motor Corp. to Nintendo Co. have raised their profit forecasts. The cost of insuring Japanese corporate bonds from non-payment fell this week to the lowest since the 2011 earthquake, according to credit-default swap traders. The Markit iTraxx Japan index closed at 112.5 basis points on March 6, according to data provider CMA.

“Shirakawa’s term was swept up in a series of events from the Lehman shock and the European debt crisis to natural disasters,” said Yumoto of the Japan Research Institute. “He needed to show even stronger actions to influence expectations.”

To contact the reporters on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net; Masahiro Hidaka in Tokyo at mhidaka@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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