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January 2013 was a historical moment for Bank of Japan (BoJ). In a joint statement with the government, the bank officially adopted a 2% inflation target. Then Prime Minister Shinzo Abe (returning to power in 2012) was a key figure behind this decision. The statement was signed by governor Masaaki Shirakawa, but the change in policy tools was led by Haruhiko Kuroda, who succeeded Shirakawa in April 2013. There was a clear paradigm shift in terms of basic monetary-policy thought. Given Shirakawa means 'white river' and Kuroda means 'black field' in Kanji (Chinese characters), we see the shift as a move from 'White' to 'Black'—White sees Japan's deflation as a symptom of structural factors and not the reason the Japanese economy slumped, and that too much monetary easing negatively affects the financial system and risks distorting the economy, while Black believes BoJ can and should take responsibility for delivering 2% inflation.

While the Black paradigm has not changed the last 9.5 years, a better understanding of policy effects has led to policy tools changing considerably. There have been three stages, starting from: 1) simple QQE (quantitative and qualitative easing), 2) QQE plus a negative interest rate policy (NIRP), and 3) current QQE with YCC (yield curve control). This shift of stages was motivated by a change of strategy from a "short-term decisive battle" to a "protracted battle" with no major shocks. It is important to note all policy changes were designed to increase easing, or at least not lead to tightening, despite the effective withdrawal of some specific tools.Ìý

Average core CPI inflation (excluding fresh foods, due to price volatility) during Kuroda's era has been 0.4%, up from between -0.5% and 0% during the three previous governors' stewardships but far below the 2% inflation target. The latest core CPI inflation figure (for August) is 2.8%, but BoJ argues this is unlikely to continue. Moreover, inflation expectation (IE) did not rise as much as the bank had hoped. The financial markets' performances have disappointed—long-term yields fell to around zero and remained there with YCC; the equity market performed well at the beginning but lost traction later; in the FX market the yen depreciated sharply at the beginning and end of Kuroda's era (mainly the result of external factors, except at the start).

There have been many critics arguing that current BoJ policy is wrong and counterproductive for Japan's economy. We can summarise these into five points: 1) weakening of markets' functions, 2) damage to banks' profitability, 3) concerns over fiscal dominance, 4) lower productivity with more 'zombie' firms, and 5) too much movement in FX markets. However, we do not think the criticism is strong enough to change BoJ's policy direction.

We expect no policy change through 2023E, regardless of who might be the next governor or deputy governors, but we think policy normalisation could start sometime during their five-year term (through 2028). We think the most important lesson is that politics matter for the big picture while technical issues can be solved through flexibility. We think BoJ is likely to conduct a comprehensive review before any real policy change.