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Shinzo’s Samurai – Fighting Deflation in Japan

Bob Baur's Photo

During a recent visit to the United States, the message of Japan’s prime minister Shinzo Abe to President Obama was “Japan is back!”  This is Abe’s economic battle cry in his fight to end two decades of deflation, meager growth, and economic malaise. And much like Japan’s feudal lords of a bygone era, Shinzo Abe has a trusted advisor ready to lead his country into battle – a samurai, if you will. Shinzo’s samurai, to coin a phrase, is his appointee for the governor or the Bank of Japan, Haruhiko Kuroda.

Governor Kuroda’s first foray will be during this week’s policy meetings of the Bank of Japan. This week’s meetings, Kuroda’s first, will be his initial test to see if he can achieve the results that eluded his predecessor, Masaaki Shirakawa. Kuroda has assumed his own battle cry of sorts, adopting language from the European Central Bank’s Mario Draghi. “Whatever it takes!” That’s what Kuroda says he’ll do to reach a 2% inflation target within two years – a goal imposed by Abe on the central bank.

The samurai’s code of conduct, or bushido, governed all aspects of his life. Kuroda seems to have taken a page from Ben Bernanke’s bushido. The influence of the Fed chairman can be seen in Kuroda’s selection of economic weapons, and like the samurai, Kuroda carries an impressive set of weapons to battle.

The sword was the samurai’s primary and most distinctive weapon, and came in two flavors: the katana, or long sword, and the wakizashi, or short sword. Kuroda’s primary weapon, his katana, is the program of open-ended asset purchases by the central bank, expected to begin next year. With this week’s policy meeting, Kuroda may reveal his backup, his wakizashi; pulling the asset-purchase program forward into 2013, or even announcing its immediate start. When the samurai carried both the katana and the wakizashi, the pairing was called a daishō and was considered especially formidable. Should Kuroda combine his asset-buying program with an announcement of an early start, he will strike an aggressive pose.

To extend his range in battle, the samurai used the longbow, or yumi. Similarly, Kuroda may expand the range of his economic armaments by extending the maturity of the bonds the central bank purchases; moving from a focus on short-term to perhaps the very  long-term – maybe up to 30 years. There may also be a suggestion that the rate of asset purchases be raised above what is called for by the current plan. Kuroda may also consider “unconventional” securities for its arsenal of asset purchases: foreign bonds, Japanese REITs, or even corporate bonds.  All of these options would expand the width and breadth of Kuroda’s possibilities in monetary policy. The last page that Kuroda may take from the bushido of Bernanke is initiating forward guidance by stating that the new policy would stay in effect until a specific target is reached, thus helping to solidify market expectations.

With Japan’s stock market soaring and the currency having fallen from 77¥/$ to around 95¥/$, markets are primed for significant action. The world wishes Shinzo’s samurai well in his efforts, and with Europe still in recession, a new source of global growth would be very welcome.

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