March 9, 2017 7:30 am JST
BOJ watch

New challenges await reunited BOJ policy duo

Officials behind post-crisis easing now tasked with normalization

JUN ISHIKAWA, Nikkei staff writer

The Bank of Japan

TOKYO -- The Bank of Japan has replaced the head of its monetary affairs department for the first time in five years, bringing together a mentor-and-student pair that once urged on a recalcitrant central bank but is now confronted with the opposite problem.

Takeshi Kato, previously director-general of the information system services department, has taken over from Shinichi Uchida, who now heads the BOJ's Nagoya branch. Kato will work with Executive Director Masayoshi Amamiya to steer policy behind the scenes.

Kato led the central bank's policy planning division, the branch of the monetary affairs department responsible for the nuts and bolts of policy proposals, during the tenure of Gov. Haruhiko Kuroda's immediate predecessor, Masaaki Shirakawa. Under Amamiya, then director-general of the monetary affairs department and later executive director, Kato played a key role in determining the BOJ's response to the yen's climb after the global financial crisis and the 2011 earthquake and tsunami.

The department did all it could think of to rein in the currency's rise, such as long-term loans with a fixed 0.1% interest rate and a "comprehensive monetary easing" program involving purchases of Japanese government bonds and exchange-traded funds. More forceful measures included catching markets off-guard with emergency policy meetings as well as yen-selling in conjunction with monetary easing.

Yet the currency continued its upward march. Markets were relentless in their criticism of the BOJ for doing too little too late, and Shirakawa, who warned against overdependence on monetary policy, took the brunt of it.

Amamiya and Kato were caught between a government and ruling coalition exasperated by a lack of action and a governor who refused to let the BOJ overstep its bounds as a central bank. The pair was moved away from the BOJ's policy nerve center, with Kato appointed manager of the bank's Nagasaki branch in July 2011 and Amamiya tapped to head the Osaka branch in May 2012. But neither was likely pleased about these postings, an insider recalled.

The situation underwent a complete turnaround as time went on. Kuroda, an advocate of the idea that monetary easing has no limits, took the helm and embarked on a bold easing program with Amamiya as his right-hand man. Critics of the BOJ's prior approach were silenced, with some even worrying that the central bank was going too far in the other direction. The honeymoon between the government and the BOJ would have been unimaginable during Shirakawa's tenure.

Though this may sound like a happy ending, Kato and Amamiya have other challenges to face. After Kuroda's massive bond and ETF purchases, negative-rate policy and guidance of long-term rates, concerns are mounting that the central bank is running out of ammunition. Should another shock strike the Japanese economy, the BOJ's options may be limited.

Even if the economy and inflation pick up, exiting an easing program that has left 400 trillion yen ($3.49 trillion) in JGBs on the BOJ's books will be no easy task. And the bank's relationship with the government could turn sour again. The duo that struggled to work with a governor that did too little must now deal with a governor who may have done too much.

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