Kuroda Leaves Magical Thinking Behind as BOJ Slogs Ahead

(Bloomberg) -- The thing is, boys can’t fly. No matter how much they believe.

Bank of Japan Governor Haruhiko Kuroda didn’t mention that on Wednesday, when he spoke at an annual BOJ conference in Tokyo. But he’s been forced to acknowledge it, at least implicitly, since famously invoking Peter Pan in a speech at the same event three years ago.

“I trust that many of you are familiar with the story of Peter Pan, in which it says, ‘The moment you doubt whether you can fly, you cease forever to be able to do it,’" Kuroda told the gathering on June 4, 2015. "Yes, what we need is a positive attitude and conviction.”

Kuroda is hosting this year’s conference, whose theme is "central banking in a changing world.” Raghuram Rajan, former governor of the Reserve Bank of India, will deliver the keynote speech.

“It would be so out of place if Kuroda made the Peter Pan speech today,” said Masamichi Adachi, a senior economist at JPMorgan Chase & Co. and a former BOJ official. “The BOJ has learned that trying to influence expectations doesn’t really work. In Japan, it seems it doesn’t work unless everyone believes in inflation.”

Long Road

Federal Reserve Bank of St. Louis President James Bullard, speaking in Tokyo on Tuesday, said the BOJ’s frustrating battle with inflation has been instructive for the rest of the world, showing how tough things can get if inflation expectations get rooted at a low level.

And the going got tough for Kuroda’s vision. About a year after his Peter Pan speech, Kuroda described raising inflationary expectations as an "unprecedentedly difficult challenge." Within months, the BOJ had shifted its policy framework to yield curve control -- a move meant to achieve sustainability for the long road ahead to 2 percent inflation.

Now, with nearly another two years gone, the road still stretches into the horizon. Lately, Kuroda is less about magical thinking, more about chagrined determination.

To be sure, Kuroda has made a believer of some -- at least to a degree. He oversaw Japan’s longest economic expansion in nearly three decades, and wages are rising, albeit modestly, by the most in years. With a weaker yen as fuel, the Nikkei earlier this year hit the highest level since the early 1990s.

Yet as Kuroda enters a sixth year at the helm of the BOJ, inflation isn’t even halfway to its target. Japan’s core inflation, which excludes fresh food, registered 0.7 percent in April, after a second straight monthly decline. Few private economists forecast sustained 2 percent core inflation to be reached in coming years.

Kuroda on Wednesday said the economic and financial environments surrounding central banks had changed significantly in recent years. He said it is "urgent" to understand the global decoupling of improved economic growth and higher wages and inflation.

"This phenomenon has recently been labeled the ’missing inflation’ or ’missing wage inflation’ puzzle," he said.

Kuroda may not be living the dream anymore, but expect him to stay on his new message. Lately this has been about patience and the need to stay the course. In a statement after last month’s policy meeting, for the first time under Kuroda, the BOJ removed any mention of when it expected to achieve 2 percent inflation.

©2018 Bloomberg L.P.