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Economy

Abe closes door to talk of an early end to monetary easing

Japan's prime minister to keep BOJ Gov. Kuroda and invite a reflation advocate

Prime Minister Shinzo Abe, left, trusts Bank of Japan Gov. Haruhiko Kuroda's skills but worries about his "Finance Ministry blood."

TOKYO -- By nominating a staunch reflation advocate to a top post at the Bank of Japan, Prime Minister Shinzo Abe seems to be quashing any thoughts of an early end to the monetary easing that forms the backbone of his signature economic policy.

The government chose Waseda University professor Masazumi Wakatabe and BOJ Executive Director Masayoshi Amamiya Friday to fill the two deputy governor seats that will be vacated in March. Gov. Haruhiko Kuroda was nominated for a second five-year term, as expected.

The Japanese currency dropped by around 0.4 yen against the dollar shortly after The Nikkei reported early Friday morning that Wakatabe was favored for the leadership post, while foreign commentators on Twitter noted the academic's reflationary bent. One remarked that "this guy literally wrote the QQE book," posting a picture of "Japan's Great Stagnation and Abenomics: Lessons for the World," a work by Wakatabe discussing the impact of such policies as the BOJ's quantitative and qualitative easing program.

Abe considered Kuroda's reappointment an important measure to reassure markets that he remains committed to continuing easing -- a must as the government takes its next steps to expand the economy. Replacing a figure so central to Abenomics could have given the impression that the program has failed.

Yet Abe has not wholeheartedly embraced his pick for governor. Though he insists that he trusts Kuroda's skills, he has occasionally expressed frustration when asked about the BOJ chief by friendly lawmakers, citing Kuroda's "Finance Ministry blood."

The prime minister harbors a deep-seated distrust of the ministry, in part for its ultimately incorrect prediction that fiscal stimulus would bring consumer spending bouncing back after the consumption tax was raised from 5% to 8% in April 2014.

Waseda University professor Masazumi Wakatabe is an outspoken proponent of aggressive monetary easing.

Abe's perception that Kuroda's decades in the Finance Ministry influence his thinking dates back to a February 2015 meeting of the Council on Economic and Fiscal Policy. Kuroda said there that it was "extremely important" that the government achieve a primary surplus in fiscal 2020, warning that Japan's finances were "in such dire straits that we must take more serious action."

The prime minister's complicated feelings toward Kuroda factored into the nomination process for the BOJ deputy governors. Abe initially set his sights on Etsuro Honda, a close ally and key economic adviser now serving as Japan's ambassador to Switzerland, to counter the ministry's influence.

Satoshi Fujii, an adviser to the Cabinet Office, backed Honda's nomination at a meeting with the prime minister in December. Fujii explained such concepts as a high-pressure economy -- in which policymakers temporarily tolerate a degree of overheating in order to beat deflation faster -- which Abe called "interesting."

But the Finance Ministry and the BOJ warned Abe away from Honda. "There's no need to cause turmoil by appointing Honda when the economy's running fine," Finance Minister Taro Aso, Abe's right-hand man, told the prime minister.

The ministry, which traditionally plays a major behind-the-scenes role in central bank appointments, offered five alternatives, including Columbia University professor Takatoshi Ito. The prime minister's side refused to entertain any of its suggestions.

Bank of Japan Executive Director Masayoshi Amamiya has earned the nickname "Mr. BOJ" for his central role in crafting monetary policy.

Though Honda also has a Finance Ministry background, he remained outside its main operations, such as budgets and taxes. He advocates aggressive fiscal stimulus alongside monetary easing, and was involved in the government's two postponements of a second consumption tax hike. The ministry was keen to avoid having Honda join the BOJ's leadership, which would give him the opportunity to campaign openly against raising the tax in October 2019 as scheduled.

Abe ultimately opted against Honda -- possibly in the face of resistance from Kuroda himself, whose reappointment had already been settled -- instead nominating fellow reflationist Wakatabe. Honda recommended Wakatabe to Abe as someone who would agitate for and could engineer a more aggressive monetary policy.

The prime minister's insistence on choosing a reflation advocate is also part of his broader economic strategy. Abe expressed concern at a dinner late last year with senior lawmakers in his Liberal Democratic Party that raising the consumption tax as planned would break the back of the economy in 2019 or 2020 -- a particular concern with local and national elections coming up next year.

The idea was raised of passing a big supplemental budget to shore up the economy. This plan rests on the assumption that interest rates will remain low.

Etsuro Honda, a key economic adviser to Abe, was the prime minister's first choice for Bank of Japan deputy governor.

As central banks in the U.S. and Europe move to tighten monetary policy, speculation has swirled among market watchers that the BOJ might follow suit. Nominating Wakatabe alongside Kuroda seems meant to push the bank further away from an easing exit and keep interest rates low for longer.

But the BOJ's negative interest rate policy has come with side effects, such as lean profit margins for banks. Though numerous examples exist of central banks taming excessive inflation, no major countries have emerged successfully from long stretches of deflation. Abe, looking to make Japan the first, is in uncharted territory.

Nikkei staff writers Takeshi Kihara and Kosuke Takami contributed to this article.

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