* BOJ's Kuroda pressures PM Abe on 'third arrow' reforms
* Shift shows Kuroda confident of hitting inflation target
* Even reflationists see waning need for stimulus
* Risks of growth lagging behind inflation
By Leika Kihara
TOKYO, June 16 Bank of Japan (BOJ) Governor
Haruhiko Kuroda has a simple message for Prime Minister Shinzo
Abe: It's time to fire the 'third arrow' of reform or risk
squandering the efforts of the past 18 months to revive the
Kuroda, confident that the BOJ's massive monetary stimulus
is pulling Japan out of two decades of growth-sapping deflation,
is under no illusion that money-printing alone can underwrite a
A long-time critic of the BOJ's past cautious approach to
policy making, Kuroda's bluntness has found a new target: Abe,
who in 2013 hand-picked the Oxford-educated economist and former
finance ministry mandarin to recharge the economy.
Specifically, Kuroda is pressing for reforms that the prime
minister has promised in order to reverse the decline in prices
which has crimped growth, profits, investment and consumption
since the late 1990s, say sources familiar with his thinking.
He wants Abe to walk the talk.
Last month Kuroda strayed from central bank territory into
the government's remit, telling a Tokyo audience that to revive
Japan's "animal spirits", the government must fix problems like
labour shortages that are growing acute as the economy recovers.
A week later Kuroda stressed that it was critical to have
"efforts beyond the realm of a central bank, like those
undertaken by the government and companies" to ensure growth in
the medium to long term.
Analysts say Kuroda's unusual candour comes with risks.
"He can say these things now because the economy is on
track," said Koichi Haji, chief economist at NLI Research
Institute. "But there's always a risk it will backfire and put
him under heat, particularly if inflation doesn't reach 2
The stakes are high. Abe's "growth strategy" is expected to
be unveiled around June 27.
Analysts say Kuroda's comments were probably timed to
influence discussions on the strategy, especially as supply
constraints, including a shrinking workforce and weak
productivity, have surfaced faster than the BOJ had anticipated.
If Abe's package fails to rev up Japan's paltry growth
potential, the recovery may falter. Worse still, if financial
markets lose faith that Tokyo will rein in the industrial
world's heaviest public debt burden, interest rates could spike,
wrecking the recovery and damaging the financial system.
FROM DEMAND TO SUPPLY
Japan's economy has gained speed over the past year thanks
to the first two arrows of rapid monetary expansion and fiscal
stimulus, with inflation reaching the half-way mark of the BOJ's
goal of achieving 2 percent inflation next year.
The BOJ chief does not think his mission is accomplished
yet, but people familiar with his thinking say he is already
focusing on what happens after he hits his price goal.
There is no guarantee of success, but Kuroda's push for the
government to deregulate the economy may have come at an
opportune time. Even some easy-money advocates close to Abe say
the economy now needs reform more than stimulus.
"As things stand now, only prices are rising while the
growth rate isn't rising," said a person close to the finance
"So we're heading into a situation nobody wants, where wages
don't rise - only prices do. It's natural for Mr Kuroda to
stress the importance of the supply side."
In Kuroda's Tokyo speech last month, he listed some economic
challenges: enhancing productivity, bringing more women and
elderly into the workforce, employing highly skilled foreigners
and putting public finances on a sustainable footing.
These are precisely the kinds of policies Abe has promised
to tackle with his 'third arrow' of reforms. On Friday, he
unveiled a plan to cut the corporate tax rate below 30 percent,
in stages, to spur growth.
Yet, outlines of the "third arrow" policies and drafts seen
by Reuters offer only broad goals with few specifics. Previous
reform proposals have disappointed investors as vague and
Kuroda kept up the pressure, telling a news conference on
Friday that the government has work to do. "The central bank
ought to achieve price stability and the government a domestic
demand-driven growth," he said.
The issue assumes an urgency for the central bank chief as
the ageing workforce shrinks and productivity ebbs.
"Simply ending deflation won't guarantee Japan will return
to the days of strong economic growth," said Hideo Hayakawa, a
former top BOJ economist who still commands attention in the
central bank for his analysis.
He said that if Abe doesn't carry through with reforms,
Japan risks falling into stagflation.
The BOJ reckons Japan's potential economic growth rate is
less than 0.5 percent. The bank and government policy makers
want to raise that rate above 1 percent, though it would still
lag well behind the 4 percent rates Japan clocked in the 1980s.
STICKING HIS NECK OUT
With public debt worth more than twice the size of the
economy, Kuroda worries that the bond market may finally face a
reckoning for decades of profligate spending, say the people
familiar with his thinking.
Abe's government can now borrow 10-year money at just 0.6
percent - thanks largely to the BOJ's policy of buying most new
government bonds on offer - but market confidence is fragile.
A mere 1 percentage-point rise in interest rates would boost
Japan's debt-financing costs by 1.8 trillion yen ($18 billion) a
year, nearly quadruple the rise in tax revenues expected from
stronger economic growth, reckons Toshiki Tomita, an academic
member of the Finance Ministry's advisory panel.
For his part, Abe does not appear to be piling pressure on
Kuroda to do more by way of near-term stimulus, given the bank's
policy is "on track" and the job market is tightening faster
than expected, according to Kozo Yamamoto, a prominent
reflationist adviser to Abe in the premier's ruling party.
Whether Kuroda's arguments gain any traction with Abe is
another question. He has stuck his neck out. He is careful to
say the BOJ will ease further if the economy falters and his
inflation target is in jeopardy, but he has staked out a
position that could prove hard to retreat from.
(Additional reporting by Yoshifumi Takemoto and Yuko Yoshikawa;
Editing by William Mallard, Shri Navaratnam and Mark Bendeich)