Kuroda Finance: A Legacy of Unconventional Monetary Policy

Haruhiko Kuroda’s decade-long tenure as Governor of the Bank of Japan (BOJ), from 2013 to 2023, will be forever associated with a bold and experimental approach to monetary policy dubbed “Kuroda Finance.” Facing persistent deflation and economic stagnation, Kuroda embarked on a mission to drastically reshape Japan’s economic landscape.

The cornerstone of Kuroda Finance was “Quantitative and Qualitative Monetary Easing” (QQE). This involved massive purchases of Japanese government bonds (JGBs) and other assets, including exchange-traded funds (ETFs) and real estate investment trusts (REITs). The goal was to flood the market with liquidity, pushing down long-term interest rates and stimulating inflation. Unlike traditional quantitative easing, QQE explicitly targeted a 2% inflation rate, a goal that remained elusive throughout Kuroda’s term.

A key element of QQE was “Yield Curve Control” (YCC), introduced in 2016. YCC aimed to keep short-term interest rates at -0.1% and the yield on 10-year JGBs around 0%. This was a novel and controversial policy, designed to directly control the shape of the yield curve and further suppress borrowing costs. The BOJ essentially became the dominant player in the JGB market, influencing interest rates across the board.

Kuroda’s policies had mixed results. On the one hand, the aggressive easing contributed to a weaker yen, boosting exports and corporate profits. The stock market also saw significant gains. However, achieving the 2% inflation target proved persistently difficult. While inflation did rise at times, it often failed to sustain itself and remained significantly below the target for most of Kuroda’s tenure.

The long-term consequences of Kuroda Finance remain a subject of debate. Critics argue that YCC distorted market signals, reduced the dynamism of the financial sector, and created an unsustainable reliance on monetary stimulus. The BOJ’s massive holdings of JGBs also raised concerns about its financial stability and the potential for future disruptions.

Furthermore, the side effects of prolonged ultra-low interest rates included reduced profitability for financial institutions and increased risks associated with zombie companies that were kept afloat by cheap credit. As global interest rates rose in response to inflation in other countries, the BOJ’s commitment to YCC created increasing pressure on the yen and forced the central bank to defend its policy through massive bond purchases, further exacerbating concerns about market distortions.

Ultimately, Kuroda Finance was a bold experiment in monetary policy aimed at breaking Japan’s deflationary cycle. While it had some positive impacts, the long-term consequences and the failure to achieve the 2% inflation target raise serious questions about the effectiveness and sustainability of this unconventional approach. Kazuo Ueda, Kuroda’s successor, now faces the challenge of navigating the legacy of Kuroda Finance and charting a new course for Japan’s monetary policy.