Bank Of Japan Should Study Paul Volcker Era

It’s hard to think of a central banker who’s had a worse couple of weeks than Bank of Japan Governor Haruhiko Kuroda.

On December 20, Kuroda’s team announced its first policy shift in several years. By all appearances, the BOJ saw its move to widen the range in which the 10-year yield can trade as high as 0.5% seemed a minor and obvious tweak as U.S. and Japanese interest rates diverge.

The seismic reaction seemed to surprise Kuroda as much as anyone. The yen’s surge had traders everywhere betting on imminent BOJ “tapering” if not outright tightening moves.

Team Kuroda has spent the first five days of 2023 trying to clean things up. The BOJ’s unscheduled bond purchases each day are aimed at dousing expectations. The clear message is that markets wildly misinterpreted Kuroda’s intent; a BOJ rate hike is not in the cards.

Yet written between the lines in bold font here is that Tokyo needs to be studying up on the Paul Volcker era.

As Federal Reserve chairman from 1979 to 1987, Volcker came to personify the idea of the independent central banker. He was brought in to tame runaway inflation that would rise as high as 14% in 1980. By the end of that year, the U.S. benchmark rate rose to 20%.

Economic chaos ensued as global markets tried to adjust to the “Volcker Shock.” But then, that’s precisely what Volcker was hired to do: curb inflation at all costs.

Among those costs were death threats. William Silber wrote in the 2012 biography “Volcker: The Triumph of Persistence” that “everyone was really after him. There are famous stories of people even sending him their car keys because their car loans were so expensive.”

In my own interactions with Volcker during my Washington reporter days in the late 1990s, I can confirm that he hated checking his mail inbox. Homebuilders sent him blocks of wood they claimed were going to waste. Written on them were insults of the four-letter kind. Farmers shipped him boxes of rotting vegetables they couldn’t sell.

In one interview, Volcker told me that “I wasn’t hired to be popular. That was always the job.”

No, I’m not suggesting that the Kuroda BOJ—or whomever replaces Kuroda in April, when he retires—should hike Japanese rates up to 5% anytime soon. That might tank the global financial system as the top creditor nation falls off an economic cliff. But 20-plus years of bottomless quantitative easing is backfiring in spectacular fashion. It’s high time the BOJ weaned the No. 3 economy off the monetary sauce, and soon.

The conditions of Kuroda’s hire in 2013 couldn’t have been more different. Volcker took the maxim that a central banker’s role is “take away the punch bowl just as the party gets going” to the extreme. Kuroda was brought in to open the monetary spigot and fill any punchbowl he could find. And fill he did, early and often, becoming very popular in Japan Inc. circles.

But at great cost over the last decade. The most obvious is the worst inflation in 40 years as Tokyo imports commodities at elevated prices via a weak currency. The more important one, though, is how Kuroda’s liquidity boom relieved politicians of the need to implement reforms to raise Japanese competitiveness.

All that refilling took the onus off corporate CEOs to innovate, restructure and take risks. The last decade has largely been a lost period for Japan Inc. in terms of building economic strength at home while China flexed its muscles around the globe.

Now, as Kuroda prepares to pass the liquidity tap to a new BOJ mixologist, markets have no idea what to expect. Prime Minister Fumio Kishida hasn’t yet signaled who he might choose to replace Kuroda come March.

Kishida, though, already seems to be setting the stage for a BOJ replacement who will play nice—and keep liquidity flowing.

In recent days, Kishida warned that “raising interest rates has an impact on people’s day-to-day lives” and thus the BOJ might not be the best institution to tackle inflation. He’s also urging companies to implement wage hikes exceeding inflation—currently rising at 3.7% annual rate.

Perhaps Kishida didn’t pay attention in Economics 101, but these are the very definition of how a government sparks runaway inflation. First, his Liberal Democratic Party needs to act boldly to boost productivity, enable disruption and level playing fields.

The prime minister who hired Kuroda, Shinzo Abe, sure didn’t do that in his nearly eight years in power. Ditto for Kishida, who took office in October 2021 with vague plans for a “new capitalism.” With approval ratings in the low 30s, it’s hard to see how Kishida has the political capital to recalibrate the mechanics of an aging, change-averse nation.

Tokyo desperately needs a Volcker-esque figure to end this era of monetary open bars and the economic mediocrity it’s left behind. Not to crash the economy, but to incentivize Kishida’s LDP to do its job to build a more sober growth model.