The Bank of Japan’s Stealth Tapering
When Japanese Prime Minister Shinzo Abe appointed Haruhiko Kuroda as governor of the Bank of Japan in 2013, the country had been living with deflation for 15 years. Kuroda may not have achieved the BOJ’s target of 2% inflation, but that was never his only goal.
TOKYO – In December 2012, Japanese voters brought the Liberal Democratic Party (LDP) and its leader, Shinzo Abe, to power after three chaotic years of rule by the Democratic Party of Japan (DPJ). Abe himself assumed the premiership for the second time, having headed the government from September 2006 to September 2007. And in January 2013, a month after taking office, he announced a broad economic-policy package that would come to be known as Abenomics.
In launching Abenomics, Abe correctly identified deflation as one of the primary causes of Japan’s economic stagnation, which had gotten worse under DPJ rule. Deflation automatically raises real (inflation-adjusted) interest rates, and the higher they climb, the less incentive there is for businesses to invest and households to consume.
With the goal of reversing deflation, Abe forced the Bank of Japan (BOJ) to start pursuing a 2% inflation target, in accordance with the international standard. And when then-BOJ Governor Masaaki Shirakawa’s term ended in March 2013, Abe did not reappoint him, opting instead for Haruhiko Kuroda, previously the president of the Asian Development Bank.