Victory for Abenomics as Japan's maverick PM gets his pick of governor

Haruhiko Kuroda is expected to be the new governor of the Bank of Japan.

The financial press is reporting that Japan's prime minister Shinzo Abe is expected to nominate former finance-ministry official Haruhiko Kuroda as governor of the Bank of Japan. If Kuroda's nomination goes ahead, it will be a victory for Abe's desire to pursue aggressive unconventional monetary policy in order to boost Japan's economic fortunes.

Abe has been engaged in a low-level squabble with his finance minster, former Prime Minister Taro Aso, over the extent of Japan's efforts to boost growth and weaken the yen. Aso, who favours more conventional economic policy, most recently squashed the prime minister's suggestion that Japan might buy foreign bonds as a general policy.

That rift is arguably one of the most important in economic policy today. Just as Britain has been the site of the most rigorous experiment on the effects of voluntary austerity on growth (spoiler: results were negative), Japan is pushing some of the most aggressively expansionary monetary policy ever — and has ideas to go even further. Abe's government has already eroded central bank independence, forcing the Bank of Japan to actively push for growth and inflation; it has "nationalised" capital stock, allowing the state to pay for nominally private sector investment; and it has set explicit targets for the Nikkei, the country's premier stock index, of over 17 per cent growth in one month.

The tussle between Aso and Abe over the foreign bonds purchase was widely seen as a proxy fight for the right to award the governorship, and with the apparent selection of Kuroda, Abe has taken the lead. The governor-to-be has long been a critic of the BoJ's lack of stimulus and will likely encourage it to follow the government's suit in further aggressive, unorthodox measures to hit the new 2 per cent inflation target.

But Reuters' Leika Kihara and Yuko Yoshikawa inject a note of caution to their reporting:

Abe must go through political maneuvering to close the deal, as the nomination must be approved by both houses of parliament including the upper house, where his ruling coalition lacks a majority.

The government hopes to garner support from either the main opposition Democratic Party of Japan (DPJ) or a group of smaller parties to pass the nomination.

There's likely to be an even bigger fight on Abe's hands with one of his two desired deputy governors, Kazumasa Iwata. Iwata is an academic who has called for Japan to print money to fight deflation; his appointment would suggest large scale monetary expansion is on the cards. He was widely reported to be Abe's first choice as governor, before Kuroda was picked as the compromise candidate.

With an ageing population, and flunked recovery from a financial crisis, Britain's experience over the next decade may be scarily similar to Japan's over the last. If Abenomics lifts the country out of its hole, we should all be hoping Mark Carney and the rest of the Bank of England are paying close attention, and preparing to follow suit in case the worst happens.

Haruhiko Kuroda. Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Photo: Getty
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In the row over public sector pay, don't forget that Theresa May is no longer in charge

Downing Street's view on public sector pay is just that – Conservative MPs pull the strings now.

One important detail of Theresa May’s deal with the Democratic Unionist Party went unnoticed – that it was not May, but the Conservatives’ Chief Whip, Gavin Williamson, who signed the accord, alongside his opposite number, the DUP MP Jeffrey Donaldson.

That highlighted two things: firstly that the Conservative Party is already planning for life after May. The deal runs for two years and is bound to the party, not the leadership of Theresa May. The second is that while May is the Prime Minister, it is the Conservative Party that runs the show.

That’s an important thing to remember about today’s confusion about whether or not the government will end the freeze in public sector pay, where raises have been capped at one per cent since 2012 and have effectively been frozen in real terms since the financial crisis.

Michael Fallon, the Defence Secretary, signalled that the government could end the freeze, as did Chris Grayling, the Transport Secretary. (For what it’s worth, Gavin Barwell, now Theresa May’s chief of staff, said before he took up the post that he thought anger at the freeze contributed to the election result.)

In terms of the government’s deficit target, it’s worth remembering that they can very easily meet Philip Hammond’s timetable and increase public sector pay in line with inflation. They have around £30bn worth of extra wriggle room in this year alone, and ending the pay cap would cost about £4.1bn.

So the Conservatives don’t even have to U-turn on their overall target if they want to scrap the pay freeze.

And yet Downing Street has said that the freeze remains in place for the present, while the Treasury is also unenthusiastic about the move. Which in the world before 8 June would have been the end of it.

But the important thing to remember about the government now is effectively the only minister who isn’t unsackable is the Prime Minister. What matters is the mood, firstly of the Cabinet and of the Conservative parliamentary party.

Among Conservative MPs, there are three big areas that, regardless of who is in charge, will have to change. The first is that they will never go into an election again in which teachers and parents are angry and worried about cuts to school funding – in other words, more money for schools. The second is that the relationship with doctors needs to be repaired and reset – in other words, more money for hospitals.

The government can just about do all of those things within Hammond’s more expansive target. And regardless of what Hammond stood up and said last year, what matters a lot more than any Downing Street statement or Treasury feeling is the mood of Conservative MPs. It is they, not May, that pulls the strings now.

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.

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