BOJ's lone voice Kiuchi starting to be heard as QE deadline looms

By Reuters

Mar 30, 2015 06:47 PM EDT

Takahide Kiuchi often appears a lone voice of dissent on the Bank of Japan board as his proposals to change key elements of its massive monetary stimulus are consistently voted down, but two years into the policy he is looking increasingly prescient.

With the BOJ no closer to hitting the 2 percent inflation target it set for April 2015 when Governor Haruhiko Kuroda embarked on his radical money-printing drive, other members on the nine-strong board are starting to share Kiuchi's concerns about the pitfalls of the policy.

"Kiuchi's views serve as a powerful counter-balance to Kuroda because they resonate with what the ordinary Japanese feel," said Hideo Kumano, a former BOJ official and currently chief economist at Dai-ichi Life Research Institute.

"He may appear like an outcast, but he probably yields more influence on the board's debate than many people think."

The 51-year-old former market economist did not oppose the BOJ's decision to adopt its stimulus, dubbed "quantitative and qualitative easing" (QQE), in April 2013. But he proposed making it a temporary scheme to be reviewed in two years.

He also called for making the 2 percent inflation target a long-term goal without a set deadline. Both proposals have been voted down 8-1 at every policy-setting meetings.

Behind the proposals are his concern that setting too high a target could hurt the BOJ's credibility and delay an exit from massive money-printing, sowing the seeds of a future bubble.

While Kuroda has rebuffed the idea of a bubble, he has been forced to qualify the two-year commitment for hitting the target - just as Kiuchi predicted - a move that could be self-defeating by tempering price expectations.


As inflation grinds to a halt - data on Friday showed core annual inflation was zero in February when the effect of a sales tax hike was removed - and households show no signs of boosting spending, Kiuchi's persistence in pointing to the diminishing returns of QQE has gained some traction on the board.

Three other board members broke ranks and joined him in opposing October's decision to expand the stimulus, which needed Kuroda's casting vote to pass 5-4.

So far, there is little sign Kiuchi will find support for his alternative proposals from the dissenters, who share his wariness over the cost of QQE but disagree on almost everything else.

All three withdrew their opposition to October's action a month later - unlike Kiuchi, who continues to propose reverting to the pace of asset purchases before October's easing.

Kiuchi is unfazed, feeling that even without followers his lone dissent can act as a deterrent to Kuroda's radicalism.

"The costs of QQE would have exceeded the benefits at some point even without additional easing. The October move only brought forward that timing," Kiuchi told reporters on March 5. "Monetary policy isn't all-mighty, so there are limits to what it can achieve."

His persistence may come from heading a team of economists at Nomura Securities, a major Japanese brokerage famous for its cut-throat culture, where contemporaries say his quiet, restrained character earned the respect of peers.

Before joining the BOJ, he was a frequent expert commentator on economics for television current affairs shows.


When Kiuchi joined the BOJ in 2012, he was considered a reflationist who could instill a dose of boldness in a board seen by many analysts as too as timid in addressing persistent deflation and a strong yen.

But when Kuroda arrived and led a radical policy makeover eight months later, Kiuchi found himself in the camp of the conservatives suspicious that money-printing alone can shift consumer expectations of falling prices that entrench deflation.

Unlike others on the board, Kiuchi refused to change tack and continued to warn of the risks of QQE. He feels that, while QQE was effective in shocking people awake from stagnation, it is ill-suited to respond to blips in economic and price growth.

That is why the BOJ should taper asset purchases soon and revert to a policy targeting interest rates, he argues.

As the April 4 anniversary of the introduction of QQE approaches, Kiuchi faces his own time of reckoning.

He remains mum on what he will do with his proposal to review the program in two years. Kuroda is unlikely to swallow his call for ditching the timeframe, and the board is too fragmented to rally under Kiuchi in revolt against the governor.

Still, outliers have traditionally served a key role on the BOJ board and Kiuchi may be no exception.

Nobuyuki Nakahara proposed adopting quantitative easing and an inflation target in 1999, when these concepts were barely known in Japan. Years later, the BOJ adopted both ideas.

It is uncertain whether Kiuchi's proposals will see the light of day, but his presence will help the BOJ face up to the tough realities of QQE, analysts say.

Kiuchi continues to do just that.

"One big accomplishment of QQE was that it made the public understand the limits and flaws of monetary policy," he told a recent news conference.

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