Exclusive Interview

Leaders in Japan
No.1

Former Governor of the BOJ
Professor, National Graduate Institute for Policy Studies

Haruhiko Kuroda

Background of Japan’s Unprecedented Monetary
Easing & the Direction of Monetary Policy Hereafter
By Sota KatoJapan SPOTLIGHT starts from this issue a series of interviews with Japanese leaders attracting attention
with their views on various issues. Our first interviewee for the March/April 2024 issue is Mr. Haruhiko
Kuroda, former governor of the Bank of Japan (BOJ) and currently professor of the National Graduate
Institute for Policy Studies, who has drawn attention worldwide for his monetary policy during his tenure(2013-2023). The interviewer is Dr. Sota Kato, principal researcher of the Tokyo Foundation for Policy
Research and a member of Japan SPOTLIGHT’s Editorial Committee. He inquires mainly about thebackground of the BOJ’s unprecedented monetary easing and its possible future monetary policy. The big
question is whether this monetary easing will continue hereafter.
(Interviewed on Dec. 20, 2023)

Lessons from “Magnificent Experiment”
Kato: The unprecedented monetary easing you

adopted as governor of the BOJ was considered a“magnificent experiment” and attracted a great dealof attention around the world. I think it was a truly
pioneering policy. Could you tell us what lessons you
think there are from it for the rest of the world?
Kuroda: In the case of Japan, we had been in deflation for 15 years,
from 1998 to 2012. The average CPI rate of increase during thisdeflationary period was a negative 0.3%, a mild degree of deflation.
However, there were only four or five years during this period with apositive CPI rate of increase, and in all the other years it was
negative. Such a period of deflation had never been experienced byother developed nations. During this period, the rate of wage
increases had been on average a negative 0.9%, meaning roughly a
1% decline on average per year. Of these 15 years, there were morethan 10 that marked a negative rate of increases in wages. It was
extremely abnormal for such a situation to continue.
During this period, Japanese companies did not lay off permanent
employees, but instead dismissed non-permanent ones. Thus,though the official unemployment rate during these 15 years had
2 Japan SPOTLIGHT • March / April 2024

been around 5%, in reality it was worse than that. Furthermore, thecost to companies of keeping their permanent employees was sohigh that they would not recruit new employees during that period,and it became known as the employment “ice age” – a hard time forjob seekers.
At the BOJ we started quantitative and qualitative monetary easing
in 2013 to get out of this 15-year period of extraordinary deflation
and a worsening employment situation. The United States andEuropean countries as well might not have had any other choice but
to adopt such a monetary easing policy if they had found themselvesin a similar situation. So I think there is no particular lesson for othernations, as this monetary easing was precisely a response to Japan’s
unique economic situation. We needed unprecedented monetaryeasing to cope with unprecedented deflation, and I think all the major
policy authorities, central banks governors in the US and Europe, anddistinguished economists such as Joseph Stiglitz, Paul Krugman andLarry Summers with whom I have talked, understand this very well.

Background of Unprecedented Deflation inJapan
Kato: Why do you think such extraordinary deflation
occurred?
https://www.jef.or.jp/journal/

Kuroda: First of all, since 1990 we had been working hard for 10
years to deal with non-performing loans accumulated in our financial
institutions due to the bursting of the bubble economy. Thanks tothese efforts, in the 2000s Japanese financial institutions recovered
their capital mobility, but due to their experience during the collapseof the economic bubble, they have been pursuing extremely modest
business strategies and refraining from investing in or financing
projects with any risks.
Companies in Japan then were not willing to invest in facilities
after restructuring their business activities, and financial institutions
had become extremely reluctant to take any risks with their finances.
Also, the BOJ’s monetary easing policy then was not sufficient,although a number of anti-deflationary measures were taken by eachgovernor: a zero-interest policy and quantitative monetary easing
were implemented by Governor Masaru Hayami (1998-2003) and an
enormous expansion of quantitative easing was carried out by
Governor Toshihiko Fukui (2003-2008), which contributed greatly toraising prices. Then with massive intervention in yen-selling anddollar-buying, which became a sort of non-sterilization policy,
extraordinary yen appreciation was stopped and the yen ratestabilized. Then, there was a slight rise in price increases. Under
Governor Masaaki Shirakawa (2008-2013), a variety ofcomprehensive monetary easing measures were adopted to respondto external shocks, such as the 2008 financial crisis and the Great
East Japan Earthquake of 2011.
I think those governors implemented many anti-deflationary
policies and they were necessary and appropriate, but not sufficient.
We were then in a situation where corporate risk aversion continued
and prices dropped, and wages also declined due to insufficientmonetary easing by the BOJ during these 15 years.
I think there were three factors that caused the bubble economy inthe second half of the 1980s. One was the tremendous increase inpublic construction projects following the recession of the early
1980s, which stimulated investment in local tourism industries aswell. In Tokyo, investment in real estate had increased, with theJapanese government’s enhanced incentive to make Tokyo into a
global financial center. With these projects, real estate prices started
to increase in the first half of the 1980s and stock prices started torise in the second half. With such a solid background for inflation,
since the beginning of the 1980s the Japan-US Yen Dollar Committee
had been implementing financial deregulation. Banking transactions
were liberalized and the short-term fund market was expanded under
this initiative.

Furthermore, the extraordinary yen appreciation initiated by thePlaza Agreement had not been stopped in the late 1980s. The G7
tried to stop it with the Louvre Accord, but failed. Meanwhile,
Japanese monetary and fiscal policies continued to be expansionary
to cope with this yen appreciation. Japan’s macroeconomic
performance was at its best and realized 5% growth on average inthe second half of the 1980s for five years with the inflation rate
curbed at only 2.3% or 2.4 % per annum even at the end of the
1980s due to the strong yen. Business companies as well as financial
institutions made large-scale investments and stock prices soared,
with the Nikkei average having reached around 39,000 in 1989.
Against this background, the BOJ governor at the time, Yasushi
Mieno, oversaw the collapse of the bubble economy, regretting that aloose monetary policy had caused it. With the burst of the bubble,
share prices fell drastically, though real estate prices did not fall soeasily. Since then, the BOJ remained concerned about loose
monetary policy possibly triggering another bubble. As a result,
through the 1990s monetary policy had been delayed in acting tostop deflation, whereas fiscal policy tended to work more actively.
Then in 1998, with the new BOJ law, the bank became completely
independent from the government, and since then this reluctance totake an active loose monetary policy has remained robustly in the
BOJ policy mindset.
But under such changed economic and monetary situations,
without a drastic loose monetary policy we cannot improve theshrinking economy. The three BOJ governors implemented
appropriate policies, but they were insufficient, and this caused a
vicious cycle of simultaneous declines in wages and prices and theworst employment situation in the postwar period.
To get out of this, I pursued quantitative easing that had beenpreviously done and a zero interest policy, and also comprehensive
monetary easing through bond purchases and expanding this policyby massive purchases of long-term government bonds. With such
quantitative and qualitative monetary easing, we doubled themonetary base in two years and together with lowered interest rates
as a whole we tried to activate the economy. Our policies were
inevitable in responding to the unprecedented deflationary state. It
was not me but Governor Shirakawa who decided to adopt a 2%
inflation rate as a goal for price stability in January 2013. It was also
integrated into the BOJ-Japanese government joint statement andthus they decided to conduct monetary easing to realize 2% inflation
at the earliest time.
I was inaugurated as governor of the BOJ in March 2013. In theJapan SPOTLIGHT • March / April 20243

first monetary policy decision meeting in April, we adopted
quantitative and qualitative monetary easing. Prior to this decision,
we received many views on monetary policy from a variety ofexperts, including members of the BOJ Policy Board and BOJ staff.
There was a view that with the emerging two-year time lag in theeffects of monetary policy, even an ultra-loose monetary policy would
not bring us closer to the 2% goal any quicker. We discussed how
much we should implement these policies by examining simulation
outcomes based on various macroeconomic models.
There were two members of the Policy Board opposed to the 2%
price goal at the January meeting, but in April we reached aunanimous consensus on this quantitative and qualitative monetaryeasing. This policy’s scale was larger than the previous one and thequality was also different, but it basically remained a BOJ
commitment to get the country out of 15 years of continuous
deflation and realize 2% inflation as soon as possible.

Assessment of Global Economy & Japanese
EconomyKato: Next we move to current economic situations. At
this moment, I think the global economy has changed
from a deflationary state to an inflationary one, atleast in the short run, and on the whole it is
supposed to be moving in that direction a little more
continuously. What is your view on this and also
what is your outlook?
Kuroda: I have talked with many US and European economists andex-governors of central banks, and their predominant view is that theage of loose monetary policy is over in general.
With the start of the Ukraine war in 2022, wheat and energy prices
soared and that turned the deflationary state into an inflationary one
at once, against the background of prices rising after the worst of theCovid-19 pandemic was over. Then developed nations all started
tightening their monetary policies by raising interest rates in 2022.
So, the perception that the phase of loose monetary policy over the
past 10 years has ended now is commonly shared in the US andEurope. Meanwhile, high inflation rates are not likely to continue. So
the majority’s view in the US and Europe is that with the current
monetary tightening, inflation rates in the US and Europe will belowered and stabilized at around 2% in 2024 or 2025.
However, the situation in Japan is somewhat different. In Japan,
4 Japan SPOTLIGHT • March / April 2024with the quantitative and qualitative monetary easing adopted in2013, inflation reached around 2% but then dropped thereafter. This
could be partly due to a last-minute surge in demand before theincrease in the consumption tax and a reactionary decline after theincrease, but more largely due to the fact that wages were raised only
a little against price increases, resulting in a real wage decline. Withdeclining wages and the inflation rate decreasing again, we could not
help but expand quantitative and qualitative monetary easing.
One important development in monetary policy was theintroduction of a negative interest rate in January 2016. The
background of this policy was the continuing large decline in oil
prices from around $100 per barrel in 2014 to $50 and eventually$30 in January 2016, which had a significant deflationary impact on
our economy. In addition, with the depreciation of the Chinese yuan,
China started to export deflation to its trading partners.
Given these economic developments, we decided to further lower
the overall interest rate in addition to expanding quantitative easing
and we introduced a negative interest rate in January 2016, and in
September adopted the so-called yield curve control with a negative
0.1% policy interest rate and 0% in 10-year government bond yields,
and thus managed to realize this yield curve with a gradual slope.
During the pandemic, with the big fall in private consumption,
prices dropped, but afterwards inflation started to return as the
economy recovered from the pandemic’s negative impact, and thenwith the outbreak the Ukraine war, wheat and energy prices started
rising. Together with the yen’s depreciation, in 2022 Japanese importprices increased by more than 40% from the previous year. This was
naturally reflected in the CPI’s rate of increase, which having once
reached around 4% per annum is now around 3%. Unlike in the US
and Europe, in Japan most imports prices rise are reflected in the
CPI. The rate of increase in import prices is now negative and oil
prices are not expected to rise under the current circumstances, andthus the CPI’s rate of increase will be gradually stabilized.
In their Spring Labor Offensive in 2023 the unions decided todemand a 3.6% wage increase, the highest for 30 years. But therealized wage hike was around 2.5% and this means that real wages
are still declining, given the 3% rise in the CPI. However, this trend
seems likely to stop, as the unions will probably call for a 4-5% wage
rate increase in 2024 and so the real wage rate increase would bearound 3%. Assuming labor productivity increases around 1% perannum, we would need a 3% wage rate increase in order to achieve a
2% price rate increase in a sustainable and stable manner, and now
we can see that possibility. If inflation is stabilized at 2%, we would

not have to continue with monetary easing any further. We could
start normalizing finances and raise the policy interest rate gradually
towards neutral, and with this, the interest rate on government bonds
will start rising.
In the US and Europe in general, and also in Asia, monetary policy
is now returning to normal and the majority view is that the loose
monetary policy of the past 10 years or more will not be conducted in
the coming years. However, in Japan the situation is different due tothe bursting of the bubble economy and the long period of deflation
since 1990. Whether our economy has completely escaped from thisextraordinary situation will depend upon the Spring Labor Offensive
in 2024.

Social Norms in Prices & Wages in Japan
Kato: In your press conference on the occasion ofyour leaving the BOJ in April 2023, you mentioned
the robust and insistent norms in Japanese society inprices and wages as the reason for your having failed
to achieve the 2% inflation target in a stable manner.
You bravely tried a variety of policies to achieve thisgoal, but the triggers for the recent price increase
were external shocks to the economy such as the
pandemic and the Ukraine war. Do you think thepolicies you conducted will not be able to changethese norms?
Kuroda: Yes, certainly the social norms in Japan that prices andwages would not increase cannot be easily changed. From 2013 until
2019 just before the pandemic, inflation had been around 1% andwage increases had been even lower than that. On the employment
side, 40 million jobs were created and the unemployment rate was
2.5%. With such significant improvement in the employment
situation, a price increase to a certain extent was achieved but it
failed to reach 2%. It is true that this situation has been changed bythose two shocks – the pandemic and the Ukraine war.
But we managed to prevent the Japanese economy from falling
into stagflation in spite of the continuing pandemic and the Ukraine
crisis, with corporate profits doubling and 4 million new jobs created,both achieved by a continued monetary easing policy. Without thisimprovement in the economic situation, the yen’s depreciation due toprice increases for wheat and energy from the Ukraine war would
have provoked inflation and a significant negative growth rate at thesame time.
These norms that developed during the 15 years of deflation are
not easily broken. However, it is not right to say that we should haveset our inflation rate target at 1% instead of 2% under such insistentnorms.
Kato: I think norms is a kind of Nash equilibrium in theacademic sense, a situation where the mindset andbehavior of all are in accord. In deflationary Japan,
might this norm be a rational one simply reflecting
the socio-economic situation? Individuals andcompanies alike are anxious about the future andfalling into negative thinking about such issues as
depopulation and feeling that nothing positive will
happen to the Japanese economy, and that therefore
it would be better to save as much money as
possible rather than investing or consuming. Do you
think such a view on contemporary society has acertain logic and rationale in accordance with thecurrent economic situation in Japan?

Kuroda: No, that does not make sense at all. The population is also
decreasing in South Korea and Taiwan. In Europe as well, apart fromnations like Germany where immigrants now make up 25% of thetotal population, in many countries the population is decreasing, butthey are not suffering from deflation. It is wrong to think that
depopulation will lead to deflation. Depopulation would certainly
reduce consumption but also supply capacity as well. With adecrease in both demand and supply, we cannot tell whether an
economy would be inflationary or deflationary.
By coincidence, the Japanese working-age population started todecrease in 1995 and the total population started to decrease as wellaround 2001. This was noted against the background of 15 years ofdeflation. But after the introduction of quantitative and qualitative
monetary easing, 4 million jobs were created. It is certainly true that
population growth would significantly affect overall growth potential.
For example, the US economic growth potential is 1.5 or 2 and theJapanese one is 0.5 or 1, and the difference between the two is 1%,
corresponding to the difference in both nations’ population growth,
namely the US one is 0.5% and the Japanese one is a negative 0.5%.
On the difference in growth potential between Germany and Japan,
German growth potential is 1-1.5 with a 0.5 difference from theJapanese one, corresponding to the difference in population growth
Japan SPOTLIGHT • March / April 2024

5

between the two nations – that is, Germany is zero and Japan is anegative 0.5%. So it is true that population dynamics would affect themid- or long-term growth potential significantly, but population
growth is not the sole factor determining growth potential. Labor
productivity growth is another factor. With labor productivity growthhaving been little different between the US and Japan during these
10-15 years, the difference in their growth potential can be mostly
explained by the difference in population growth.

Prime Minister Shinzo Abe on the whole worked hard on structuralreform and fiscal support, as well as trying to save the Japanese
economy from the continuing deflation, which resulted in asignificant improvement in the employment situation and a certain
degree of investment recovery. But our efforts were not successful inachieving a virtuous cycle of wages and prices. Prices increased to acertain extent but did not lead to wage hikes. The mindset behind thisvicious cycle was not easily broken.

Kato: With a firmly established norm of notencouraging wage or price rises or investing, aperson or a company diverging from it would be aloser.

Kato: In Europe, there is a tradition of neo-corporatism,
collaboration in policy making between labor unions,business, and government. Did such a collaborative
mechanism exist in the Abe administration as well?

Kuroda: Yes, financial institutions also may have found it better not
to take risks. Business corporations with bad memories of the
bursting of the bubble hesitated to make new investments. They only
lower the prices of their products, not raise them, and employees
found it crucial to secure jobs rather than gain higher wages, andthus they were getting into a vicious cycle with a nearly 1% annual
decline in wages, mainly in bonus payments.

Kuroda: Yes. The Federation of Economic Organizations was also
working with us. But even with collaboration among the three, we
could not induce both labor unions and corporations to come back toa wage-price virtuous cycle after their 15-year experience of annual
0.9% wage declines and price falls, albeit little and gradual. At thismoment, with a more than 40% import price rise due to the Ukraine
war leading to a 4% CPI increase, the wage increase demand in the
Spring Labor Offensive would reach 3.6% in 2024, and we should be
able to break the last barrier to a virtuous cycle. In 2024, if weachieve a wage hike higher than the inflation rate, I expect that thebad norm will be completely broken and we will be able to realize the
2% inflation rate target in a stable, sustainable and continuous
manner.

Kato: I think the government and the BOJ shouldintervene to move the economy from a bad norm to agood one. I have the impression that the BOJ was
actively working on this in the monetary policy area
under your leadership. However, the other two key
policies needed to change a bad norm, namely fiscal
policy and structural economic reform policy, do notseem to have caught up with the BOJ’s efforts. Is it
necessary to have collaboration between the BOJ
and other public policy authorities to save theeconomy from a bad norm?
Kuroda: I do not think so. Under Abenomics, as you know, a wide
range of policy measures have been made, such as encouraging
women’s social activities, expanding support for raising children, andexpanding preferential tax treatment for GX or DX. Such policies
worked well, and the majority of the 4 million newly created jobs
were for women.
On the issue of raising wages, it was the ruling Liberal Democratic
Party, not the opposition parties, that was working with the JapaneseTrade Union Confederation in trying to do this. The administration of
6 Japan SPOTLIGHT • March / April 2024

The Cause of the Yen’s Depreciation
Kato: On the yen’s current depreciation, there must be

many factors behind it, such as the interest rate
differential between Japan and some other countries,or the Japanese economy’s growth potential. Whatdo you think about these factors?
Kuroda: When I was governor of the BOJ for those 10 years, theexchange rate was miraculously stable within a range of 10 yen at
about 110 yen to the dollar for nine of those years. Even after 15
years of deflation, the yen rate was more or less maintained. When
the Ukraine crisis started on Feb. 24, 2022, the rate was 115 yen to
the dollar. So it would be completely wrong to say that the yen isgetting weak because the Japanese economy is losing its

international competitiveness. The exchange rate cannot be explainedby such an argument. Of course, the mid- or long-term exchange rate
is fixed by a nation’s economic fundamentals. But the yen’s
depreciation that started in February 2022 cannot be appropriately
explained by such fundamentals.
On the other hand, looking at Japan’s current balance, often noted
as a good indicator of foreign exchange demand and supply, its
surplus has been expanding even with the trade balance in deficit. In
spite of that, the yen has not appreciated because with thetremendous increase in external assets, the surplus in the primary
income balance is largely increasing, even though there is deficit in
the trade balance in goods and services.
Returns on FDI or indirect investment overseas are counted in theincome balance, but it is another story whether such overseas
earnings will come back to the mother nation. Even with a large
current surplus, much of it will not necessarily come back to theforeign exchange market. Looking at the capital balance, there are
FDI and indirect investments, and the largest fluctuations in capital
movement are observed in the short term for indirect investments.
So the expanding interest rate gap has been increasingly affecting
these short-term investments. There was a narrative that although in
2022 in response to 8% inflation in the US and 11% in Europe, they
all at once raised their policy interest rates widely, Japan did notchange its yield curve control and then with the interest rate
differential between Japan and those nations expanding, the yen’s
depreciation was triggered. I do not believe it, because it depends on
exactly what interest rate differential is being referred to in thisnarrative – the short-term differential or the long-term one, or acovered interest rate parity or an uncovered one? It also depends onthe exchange rate to only the dollar or to other currencies like theeuro or Chinese yuan.
I would not predict any future exchange rate value. It is true that
the Japanese economy is now performing extremely well. We will see
economic growth in the 1% range continuously in 2022, 2023 and2024, meaning continuous growth higher than Japan’s growthpotential of 0.5-1.0%. Japanese corporate business profits reachedtheir highest in history, having exceeded those during the bubble
economy. The labor market is tight and there is even a shortage oflabor. In this light, the current yen rate is too depreciated and atsome point it will return to the level of around 110 yen to the dollar.
We cannot say when and how this will happen, since it will depend
upon market situations.
I think it is easy to predict interest rates, as it is basically to predict(From left to right): Interviewer Sota Kato, JEF Editor-in-Chief Naoyuki Haraoka, and former
BOJ Governor Haruhiko Kuroda

the central bank’s monetary policy. The central bank seems to control
policy interest rates only in general, but it does so by assuming any
rate change’s impact on mid- and long-term interest rates. Thus we
can have a correct prediction for either short-term or long-term
interest rates by predicting what the central bank would do.
Share price predictions may appear more difficult, but this isbasically equal to predicting corporate profits, and it would be easy to
predict them either this year or next year. But you would not be able
to correctly predict foreign exchange values, as it would need to bedone by taking account of expectations or speculation. Also,
government intervention in foreign exchange markets would need tobe counted as a final factor that we cannot predict at all. So I think it
better not to make any foreign exchange rate prediction.
Kato: Although we are not quite sure about achieving astable 2% inflation rate, we can see a little hope for itat this moment.
Kuroda: Yes, it is true. What makes Japan different from the US andEuropean countries is that they are now engaged in tightening
monetary policy by making rapid and significant interest rate hikes todeal with inflation. Japan is not in such an inflationary state and ispursuing its 2% inflation goal in a stable manner. We need to raise
the policy interest rate slowly to achieve it. The household sector inJapan has around 2,000 trillion yen in financial assets and it would
benefit from the possible rise in saving deposit rates. BusinessJapan SPOTLIGHT • March / April 20247

corporations owning great amounts of cash and deposits will not
suffer much from a little interest rate rise. The government itself will
be most affected by interest rate rises in Japan. With a gradual rise in
the policy interest rate, the interest rate on national bonds would rise,
and the government’s refinancing bonds or newly issued bonds
would be affected by such a rise. Assuming the average interest rateof all government bonds including short-term and long-term ones
was a little less than 2% around 2000, government bond interest
payments would amount to 30 trillion yen, which would create amuch bigger government expenditure increase than the 5 trillion yen
increase in defense expenditure or the 3.6 trillion yen increase ingovernment support for child-raising.

Possibility of the BOJ Falling into Excessive
Debt
Kato: As the interest rate continues to be raised, it has

been pointed out that the BOJ could be in excessive
debt due to increased interest payments on reserve
deposits. By holding such big “unrealized losses” ingovernment bonds not explicitly present inaccounting, could the BOJ achieve its mission by
maintaining market confidence?

Kuroda: The BOJ, the Federal Reserve Board and the European
Central Bank do not have market evaluations and so there would be
few occasions where they fall into excessive debt. But they could
have deficits. At this moment, the FRB and ECB have deficits and they
do not make payments to the treasury. The Australian Central Bank is
now in excessive debt and in its case, all of its assets are subject tomarket evaluation and with the interest rate raised, government
bonds would record a capital loss.
Although the BOJ, FRB and ECB do not have market evaluations
for government bonds, with the rises in policy rates their interest
payments on reserve deposits would increase. On the other hand, theinterest rate on government bonds will increase by the same degree.
Therefore, the difference in speed between reinvestment ingovernment bonds with higher interest rates and interest paymentson reserve deposits would determine whether the BOJ is in deficit.
If the interest rate on government bonds rises before the policy
interest rate, the BOJ replaces the government bonds on due dates
with ones with higher interest rates, so they would not be in deficit.
But if the policy interest rate is raised prior to the rate on government
8 Japan SPOTLIGHT • March / April 2024

bonds, as the due dates of government bonds come around only
slowly and if the speed of replacing them with new bonds with higher
interest rates is slow, then there would be a deficit and the BOJ could
not make payments to the national treasury. In the case of the FRB
and ECB as well, they raised policy interest rates rapidly and theirinterest payments increased likewise. But if there was not enoughtime for them to quickly reinvest in new government bonds withhigher interest rates, then they would have a deficit. In Japan, we
have an allowance for credit losses reserved annually with half of thedifference between interest payments on reserve deposits andoperational income from government bonds. So even with a loss
margin or deficit, we can use this allowance and the payments to thenational treasury would not be easily erased, and even if thisbecomes zero, it would only be temporary.
Kato: According to the latest BIS report on excessive
debt in central banks, they would not need to be so
anxious about it. Rather too much concern about iton the part of central banks could provoke a loss ofconfidence in them, which would make the situation
worst.
Kuroda: Yes. The Australian Central Bank is now in a deficit but it ismaintaining a presence of mind and behaving firmly.

Relationship Between Government & BOJ
Kato: The Japanese government and the BOJ haveoccasionally been in conflict, but I have theimpression that you managed this relationship very
well. Did you pay particular attention to preventing
conflicts with the government?
Kuroda: During my 10 years in office, I visited the Prime Minister’s
Office about twice a year and talked with the three premiers – Mr.
Abe, Mr. Suga and Mr. Kishida. On those occasions, I gave detailed
explanations of the BOJ’s monetary policy. In particular, I often met
informally with Mr. Taro Aso, deputy prime minister and financeminister, at various venues. I have never had any order or complaint
regarding our monetary policy from them. Under the current BOJ
law, the government does not have a way to apply pressure to the
BOJ. Under the old Act, the minister of finance could give orders to
the BOJ about policies, and he or she could dismiss the governor.

But the new Act eliminated such articles. Now, the BOJ is
independent from the government in its monetary policy decisionmaking, as is the ECB or the Bank of England.
Also, in the old Act, the Policy Board of the BOJ could decide theofficial discount rate and open market operations, but on reserve
ratio manipulation, government permission was needed. But now thispermission system has been abolished. Of course, it is the Cabinetthat appoints the governor, deputy governor and all the other Policy
Board members with the Diet’s agreement. During their five-year
terms of office, the government cannot pressure any of thosemembers to follow its own intentions, and thus it cannot force the
BOJ to buy more government bonds. The BOJ has been easing
monetary policy and purchasing lots of government bonds hitherto.
This is to bring the Japanese economy out of deflation and not tohelp the government.
Kato: The BOJ’s sharing of its 2% inflation target as apolicy goal with the government seems to be one of
the reasons for stable relations between the two.
However, after this goal is achieved and the BOJ
starts to exit from a loose monetary policy, might
there be some conflict with the government, inparticular on the question of public finances?
Kuroda: Yes. As you said, there is unlikely to be conflict in a situation
where both the government and the BOJ must continue efforts toachieve their shared policy goal of a 2% inflation rate. I do not know
yet whether any conflict between the two would arise over thequestion of increasing the government’s burden with government
bonds after this goal is realized and monetary policy becomes morenormalized. Whatever happens, the BOJ would not need to get any
instructions from the government and should not do so. I do notthink the BOJ would purchase government bonds to expand its
balance sheet and provoke serious inflation when prices and interest
rates are normalized. As I said, the government has no means topressure the BOJ and so I am not worried about the BOJ’s policy.
The concern is over the growing debt in public finances due toincreasing interest payments after the rise in the interest rate. The
government and the Diet must think about this question in depth.
Kato: If our inflation rate exceeds 2% and gets higher,
people may expect the BOJ to have anti-inflationary
countermeasures, contrary to the current situation. In

that case, the BOJ could be strongly criticized for its
long-standing monetary easing policy. At such times,
could the BOJ maintain what it believes to be arelevant policy without being influenced by outside
views?
Kuroda: It should do so since it is written in the law. In sum, inmonetary policy management, the BOJ’s most important goal is toachieve healthy economic development through price stability. Itshould not do anything against this goal. The old BOJ Act did nothave such a description of its mission, but this is clearly written in
the new one. Its first primary goal is to achieve price stability and thesecond one is to achieve stability of the payment system. The BOJ is
not responsible for achieving stability of the financial system. It is the
Financial Services Agency that is responsible for that. The BOJ has
had special finances for the banks exposed to crises that were a partof this payment system in order to stabilize it.
However, we have been trying to refrain from speaking about thewhole financial system, as we are not responsible for stabilizing it.
The FSA’s representative and the BOJ’s representative are membersof Basel Committee on Banking Supervision. In the Basel Agreement,a nation’s own government bonds should be risk-free and without
risk weight. But after Greece went bankrupt with lots of risk weight,
they discussed having a risk weight for each nation’s own
government bonds. This was not eventually realized, but anyway it is
not an issue within the BOJ’s jurisdiction. It would be meaninglessfor the BOJ, with no legal authority in financial regulations, tointervene in this issue. The BOJ must follow the rules of the BOJ Act
and do what is defined in this Act.
Kato: Thank you so much for your valuable comments.
Interviewer: Sota Kato is a research director of the Tokyo Foundation for
Policy Research. After earning a law degree from the University of Tokyo, hejoined the Ministry of International Trade and Industry (MITI, now the Ministryof Economy, Trade, and Industry, or METI) in 1991. At MITI and METI, he
served as assistant director for the Aircraft and Defense Industries Division,
deputy director for the International Economic Division, and senior fellow at the
Research Institute of Economy, Trade, and Industry (RIETI). He also served asassociate professor at Yokohama National University and professor at theInternational University of Japan (IUJ). He has an MBA (with honors) from
Harvard Business School and a PhD in political science from the University ofMichigan, and is concurrently a visiting professor at IUJ.

Japan SPOTLIGHT • March / April 20249