Photo/IllutrationPrime Minister Shinzo Abe, left, and Finance Minister Taro Aso, right, hear Bank of Japan Governor Haruhiko Kuroda speak in the Diet. (Asahi Shimbun file photo)

Cabinet nominations to the Diet for top Bank of Japan posts call for retaining Haruhiko Kuroda as governor for a second five-year term while replacing his two deputies.

Despite the proposed replacements of the two deputy governors, the Cabinet’s choices for the three central bank jobs are basically designed to avoid any radical change in monetary policy.

Immediately after taking the helm at the BOJ in 2013, Kuroda announced a policy target of raising the nation’s annual inflation rate to 2 percent in about two years. To achieve the goal, he initiated a bold program of monetary expansion dubbed “different dimension easing.”

Acting in line with his policy agenda, Kuroda has taken a series of radical and unconventional tactics, such as massive purchases of government bonds by the central bank, negative interest rates and market operations to control long-term interest rates.

During the past five years, the yen has weakened substantially against other major currencies, helping corporate profits to soar to record highs. The gradual recovery in the economy has improved the employment picture dramatically.

It is difficult to pin down how much of these improvements should be credited to the BOJ’s monetary policy.

But there is no denying that the Japanese economy has regained some strength and stability under Kuroda’s leadership at the central bank.

But the inflation rate, the primary measure of the central bank’s performance, has failed to reach his target, although it has crawled out of the negative territory. The time frame for striking the inflation target has been extended six times already.

Currently, the BOJ is seeking to achieve its goal by around fiscal 2019, which starts in April 2019. But many private-sector economists are doubtful this will happen.

Ensuring price stability is the central bank’s primary mission. Kuroda should be held accountable for his failure to accomplish the key policy goal, which he promised to do in two years, during his five years at the helm.

Even if we acknowledge that uncertainties are inherent in the business of economic management, we cannot help but raise questions about Kuroda’s caliber as a central banker. Isn’t he likely to fail again in his mission to improve the price situation in the next five years? Will he have any additional policy tools to deal with a possible economic downturn?

The three Cabinet nominees for the top BOJ jobs will face Diet endorsement hearings on their policy positions. We hope Kuroda and the others will offer convincing answers to these and other key questions.

There are other problems concerning Kuroda’s reappointment as well.

As a result of his aggressive monetary easing programs, the BOJ is now stuck with a staggering 450 trillion yen worth of government bonds.

When the BOJ finally exits from its ultra-loose monetary policy and starts raising interest rates, these government bonds could cause hefty losses.

This possibility is adding to uncertainty about the future of the nation's monetary and fiscal policies.

Kuroda needs to give sufficient and reassuring explanations about his plans to deal with these issues.

As the central bank continues and expands its extremely easy monetary policy, the market distorting effects will grow more serious.

Major Western central banks have also been grappling with this challenge. There have been cases in which a slight shift in the central bank’s policy roiled financial markets.

Even if the BOJ has no plan to change its policy stance immediately, it should not be allowed to postpone explaining its “exit strategy.”

There have been concerns that the BOJ’s programs to buy government bonds and guide long-term interest rates toward zero could undermine the government’s fiscal discipline.

In the exit process, in particular, there will be a growing likelihood of conflict between the BOJ’s moves to raise interest rates for price stability and the government’s policy efforts to prevent an economic downturn and an increase in debt-servicing costs.

When that happens, will the BOJ be able to maintain its independence?

That situation will sorely test leadership of Kuroda, who has been working in tandem with the Abe administration for the past five years.

There are a raft of questions the Diet needs to ask Kuroda to assess whether he is properly equipped to lead the central bank, which plays a core role in macroeconomic management, for five more years.

--The Asahi Shimbun, Feb. 17