Analysis-Weak yen pulling Japan away from BOJ Kuroda’s radicalism By

By Leika Kihara

TOKYO (Reuters) – A decade ago, Bank of Japan Governor Haruhiko Kuroda won praise for ending a debilitating spike in the yen with his “bazooka” stimulus.

Now the currency’s slide is putting him under siege and forcing him to reluctantly concede that once he leaves next April, the bank may start relaxing its policy that caps bond yields.

True to his dovish streak, Kuroda told a briefing last week the BOJ’s guidance to keep policy rates at “current or lower levels” won’t change for about two to three years – well beyond the end of his second, five-year term in April.

The remark triggered a sharp yen fall to near 146 to the dollar, from around 144, forcing the government to intervene to prop up the currency for the first time in 24 years.

Four days later, Kuroda retracted the comment and said the guidance won’t last that long, and could change if the economy fully emerges from the COVID-19 pandemic’s pain.

“In terms of the BOJ’s communication policy, it was a failure,” said veteran BOJ watcher Mari Iwashita. “It’s hard denying that Kuroda’s slip of tongue pushed the yen below 145.”

The episode underscores a shift in public mood that now sees years of ultra-low rates as less favourable. It also keeps alive the chance the BOJ will tweak its dovish guidance once Kuroda departs.

“The world is all about inflation and the BOJ will have a new governor,” said a source familiar with the bank’s thinking. “A leadership change opens up opportunities for a policy shift.”

On the surface, the division of labour is clear: The government will use intervention to arrest “excessive” volatility, while the BOJ will keep rates ultra-low to support the economy.

But the fact the government intervened shortly after Kuroda’s yen-weakening comments highlights the uneasy relationship between the two, some analysts say.

“The government clearly wants to reverse a weak-yen trend it sees as bad for the economy. The BOJ’s policy runs counter to this goal,” said former BOJ board member Takahide Kiuchi.

“The timing of intervention looks as if the government had to step in because the BOJ did nothing to tame yen falls,” he said. “It’s a relationship not going well, or even broken.”

So far, Prime Minister Fumio Kishida’s administration has held off on piling explicit pressure on the BOJ, with the view that ending low rates prematurely could cause a recession and inflate the cost of funding Japan’s huge debt. By law, the government cannot remove a BOJ governor from his post.

But public frustration over the weak yen and rising prices has hurt Kishida’s approval ratings, drawing grumbling from some officials over Kuroda’s stubbornly dovish stance.

“His comment signalling that interest rates won’t rise for two to three years was unnecessary,” said one government official. “That’s not his call to…