By Leika Kihara
TOKYO, Feb 10 (Reuters) - Haruhiko Kuroda leaves a mixed
legacy after 10 years running the Bank of Japan (BOJ), achieving
prices rises after decades of deflation and anaemic growth but
without engineering durable expansion fuelled by domestic
demand.
Kuroda jolted the conservative BOJ and global markets on
taking office in March 2013 by announcing unprecedented
purchases of bonds and other assets to stoke 2% inflation in two
years.
He missed that goal by nearly a decade but immediately
reversed a crippling rise in the yen and sent stocks and
corporate profits soaring in Japan's export-reliant economy,
arguably the biggest achievement of then-Prime Minister Shinzo
Abe's signature "Abenomics" stimulus.
Inflation in the world's third-biggest economy is now double
the BOJ target, but it is driven by rising raw-materials prices
and the weaker yen. The task of generating self-sustaining
growth with robust wage rises will fall to Kuroda's successor,
academic Kazuo Ueda.
Ueda, on the BOJ policy board from 1998 to 2005, played a
key role battling Japan's deflation during the an earlier spell
of quantitative easing.
Kuroda, a pragmatic career bureaucrat who spent years
tussling with the markets over a strong yen as he rose to become
Japan's top financial diplomat, believes effective communication
with the public as well as investors can enhance the effect of
monetary policy, say people who worked under him or know him
well.
His idea, they say, with setting the two-year deadline for
2% inflation was that the BOJ could enhance the psychological
impact of its stimulus policy by showing its determination to
meet the target.
Kuroda's approach was in stark contrast to that of his
predecessor, Masaaki Shirakawa, who sealed the 2% target with
the government and took then-radical stimulus measures - but
undercut them with a message that smacked of bureaucratic
caution.
'CRITICAL STAGE'
"When Kuroda became governor in 2013, I had doubts on
whether the BOJ could change policy so radically. But it did by
pledging by achieve 2% inflation in two years," former BOJ board
member Goushi Kataoka told Reuters.
"The move underscored the BOJ's determination to end
deflation. In this sense, the policy was highly effective," said
Kataoka, who retired in July.
But the Kuroda shock began to fade as soon as 2014, when
plunging oil prices and a sales tax hike derailed Japan's turn
toward growth and inflation.
As its huge bond buying faced limits, the BOJ began its
shift in 2016, switching to a policy of trying to control
interest rates along the yield curve, the start of a gradual
dismantling of Kuroda's radical experiment.
"Until 2014, the BOJ's policies were successful. At the very
least, they ended deflation," said Columbia University professor
Takatoshi Ito, a close associate of Kuroda. "But inflation
expectations, or people's perception on future inflation, didn't
change. The BOJ couldn't make full use of the benefits of an
inflation targeting policy."
In his second five-year term, Kuroda shifted focus toward
extending the lifespan of yield curve control (YCC), letting
longer-term yields move more freely and compensating banks for
the pain from ultra-low rates, including some below zero
"When Kuroda's reflationist narrative didn't work, the BOJ
had little choice but to keep doing YCC," said former BOJ
executive Kazuo Momma. "Abandoning YCC would mean the BOJ was
retreating from ultra-loose policy, something unacceptable for
Kuroda."
Kuroda now blames Japan's stubbornly deflationary mindset
for delaying the achievement of his inflation target, a logic
resembling that of the predecessor he denounced when he took
office.
What the BOJ's decade-long effort showed was the challenge
of breaking Japan's "adaptive" inflation expectations, which are
strongly affected by underlying price moves and external shocks,
BOJ Deputy Governor Masazumi Wakatabe said last week.
"We need to create a cycle in which wages and price hikes
continue stably and sustainably," said Wakatabe, a vocal
advocate of aggressive monetary easing who retires in March. "In
this sense, we're at a critical stage."
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Japan set to pick academic Ueda as next Bank of Japan chief
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(Reporting by Leika Kihara; Editing by William Mallard)
Messaging: leika.kihara.reuters.com@reuters.net))
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