BOJ Appointments and Implications

Since 1885 and start of Prime ministers, Shinzao Abe is the only prime minister of Japan to ever serve two terms, 2006 to 2007 then from 2012 to present. Abe served from 2012 to 2014 then won reelection in 2014 and remains current prime minister. Kurodo’s appointment April 9 to a second consecutive term is a first since BOJ appointment began in 1882. Eikichi Araki is the other to serve two terms but not consecutively as terms ran from 1945 to 1946 then 1954 to 1956.
Why Kuroda V Shirakawa is a policy rather than ideological issue as Kuroda sees the virtues and successes to the current QE/ Yield Control program while Shirakawa stated publicly otherwise. Abe, Shirakawa and Kuroda actually hail from the Southern Prefecture of Fukuoka and all are, I believe, members of the current ruling conservative LDP Party. Fukuoka’s current 5 million population is matched only by Hokaido prefecture then surpassed by Chiba 6 million, Aichi 7 mil, Kanagawa and Osaka with each 8 million. The policy difference is seen in the replacement of Takahide Kiuchi with Hitoshi Suzuki and the February Kiuchi speech.
GDP says Kiuchi will likely achieve 0.5 to the reporting period in fiscal 2018. His overall skepticism and why he sees risks to the downside is the Output Gap closed and remains neutral therefore 0.5 is viewed as a best case scenario. GDP growth rate projections are higher only to reflect a lower JPY and continued improvement in overseas economies.
Current Japanese economic drivers are exports and low JPY. A decline in world economies and higher JPY then exports flounder and GDP will fail to see a 0.5 target. Kiuchi fails to see the 2% Inflation target achieve as it assumes prices and wages tracks higher and this explains his persistent no votes on the BOJ board both on the overall JGB program and policy proposals to purchase Reits, ETF’s and Commercial Paper.
As Yield Control entails JGB 80 Trillion Quantity purchases at a minus 0.1 interest rate on balances and Interest rate targets and 0 on the 10 year JGB, Kiuchi actually forecast neither targets in quantity purchased or 10 year Interest will achieve. Purchases will actually drop. A shock to the economic system as in negative / positive or in world markets then the chance of program success lessens as JGB yields skyrocket or suffers a massive drop. A higher USD 10 year poses the first challenge to the Abe/ Kuroda program.
Kiuchi’s main argument dating to the Aug 2016 minutes and every meeting since is the stability and sustainability of the JGB market as the overall BOJ goal is expansion of the Monetary Base to 80 Trillion. The program goal is long run and runs to infinity until economic goals are achieved or until possibly when the BOJ concedes defeat.
Every Kiuchi proposal brought to the BOJ board since August 2016 to tweak the program was roundly defeated by votes exactly of 7 – 2. One example is sell current JGB holdings and purchase only 45 Trillion per month against a 7 year average maturity. The BOJ reports in the February minutes the Monetary Base growth rate Y v Y is growing at 20 to 25% and rate of growth in the Money Stock at 4%. The money stock growth rate in September was 3.5% and 3% to 3.5 in November.
Most importantly and I concur with Kiuchi is the limited ability for central banks to control interest rates but more importantly is the scary desire to control not only an entire market but the most important market to financial stability and economic growth.
All central banks are now trying interest rate control and each in their own unique money market system but other central banks are cutting ranges rather than forecast and implement wholesale changes as is the BOJ case. To control an interest rate contains drastically negative effects to an economy and restricts money flows, prices, loans, and the list goes on. A sharp climb in CPI for example would see interest rates rise and risk the Yield Control Program. A stasis price only sees a higher breakout potential later as pressure mounts on the price to move. Currently, the BOJ controls 40% of the JGB market.
Kiuchi’s ally Takehiro Soto and second dissenting vote on the JGP program and tweak to policy proposals will be replaced in July by Goshi Kataoka. Soto’s main argument throughout the program period is the distance from the Monetary Base to Inflation expectations are wide and an unclear long run view. Soto’s concern is JGB holdings may see a 10 year duration at negative interest rates. Further, is the unknown shape of the yield curve even upon program success.
At what point is the yield curve shape measured correctly against economic acceleration v deceleration. The consummate no vote by Soto was against the setting of long term interest rate targets especially when Inflation, GDP and interest rates sit at essentially 0. Soto favors setting short term targets and in line with current economic results. Higher Inflation for example would naturally result in setting higher short term interest rate targets. The Soto argument converges to Silvio Gesell in the Natural Economic Order. And I believe the Soto and Gesell arguments are the direction for future monetary policies, interest rates will follow CPI and price levels. The BOJ target overall is the interest rate rather than the Monetary Base and this offers a more market oriented approach.
Soto since 1999 was head of interest and fixed income strategy at JP Morgan Japan and came to the BOJ with 32 years of bank experience while Kiuchi was chief researcher at Nomura and also has 32 years bank experience.
The BOJ votes based on actual Minutes ran consistently 7 -2 and not 5-4 as was reported by others. A 5 -4 vote on overall BOJ policy, interest rates or policy changes hasn’t been seen from 2012 to 2017. This 5 – 4 figure is made up, thin air information. Kiuchi and Soto were lone dissenters in BOJ policy and Kiuchi was most pervasive while Soto came to dissention ranks shortly after appointment. Both were consistently outvoted meeting after meeting from 2013 to 2017. Kiuchi and Soto however were consistent in votes under Skirakawa and Kuroda.
The idea an ideological divide exists on the BOJ Board as in Kuroda / Abe V Shirakawa appears as a specious and most dangerous argument. An ideological amalgamation would be seen if a BOJ appointment is from the Chiba Prefecture because that Prefecture includes Tokyo. One would then assume a political and economic meld was placed on the board purposely to vote the political line rather than economic. Mayekawa was the last BOJ Governor from Tokyo and his term ran from 1979 to 1984. Tokyo was represented on the BOJ 4 times in 350 years of BOJ existence. What is seen on the BOJ Board is independence to vote and propose rather than political party line votes.
Further, GDP at 2% or better since 2008 was seen 7 times in 9 years or 7 times in 36 quarters.
BOJ Governors since 1882 hail from Southern Japan and South of Tokyo. Of the 31 past Governors, all were represented by 9 of the total 47 Prefectures.
As Japan exits yet another ” Lost Decade”, it meets the challenge with another questionable economic program but this time they add wholesale change under questionable results. One false move or one disaster would result in Japan lost for many decades. Since August 2016 Yield Control, JGB yields traveled higher from -0.29 to 0.16 while the US 10 year rose from 1.31 to 2.64.

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