TOKYO Bank of Japan Governor Haruhiko Kuroda used classic shock tactics on Friday to push through his latest unconventional monetary policy of negative rates: deny, then strike.
Despite months of Kuroda saying the policy was not a timely option, BOJ officials had been quietly considering it as financial markets began to question just how far the central bank could go with its aggressive asset-buying programme.
"Never say never" is a mantra for BOJ officials, who see themselves as pioneers in battling deflation - through zero rates, quantitative easing and other unconventional policies.
But a razor-thin 5-4 vote underscores the difficulty Kuroda had in winning enough board backing for his shock tactic, and illustrates the doubts among board members about the governor's line that by sticking to a 2 percent inflation goal the BOJ can make people believe prices will rise.
Publicly, Kuroda was unwavering in saying Japan was on track to hit his ambitious inflation target and that quantitative and qualitative easing (QQE) was working down through the economy.
But talk of more monetary easing began to emerge last month as policymakers fretted over weak inflation expectations, enough to ponder expanding the stimulus, said people familiar with the BOJ's thinking.
The bank's latest quarterly survey showed that corporate inflation expectations weakened in October-December, and other similar market gauges also sagged. Companies blamed the global economic uncertainty for not raising wages or capital expenditure.
Fine-tuning QQE last month with elements of monetary easing signalled some alarm among central bankers over the heightened deflationary risks, the people said.
Top BOJ economists began looking into whether to further modify QQE or go for a full makeover of the monetary easing framework - all the time considering what policy tools were still available if the BOJ eased again.
Negative interest rates was one of those options, though it was down the list given the technical difficulties of expanding base money while charging banks for piling up funds in BOJ accounts.
At the start of the year, Kuroda switched to stronger language in public to warn he would do "whatever it takes, including more easing," to hit his price target - likely prompted by the impact of global market turbulence on Japanese share prices and local business sentiment, the people said.
"When stocks are falling this much, it's hard to justify not acting," said one of the individuals, who has occasional contact with Kuroda.
On Jan. 21, a day before flying out for the annual World Economic Forum in Davos, Kuroda told Japan's parliament he was not considering negative interest rates. But he quietly told his staff to come up with several options in case the BOJ eased.
"Of course, our staff knew that several central banks have adopted negative interest rates, so they've been analysing the step for some time," Kuroda said at a news conference on Friday. "They raised it as one of the options, which we discussed at today's meeting."
By the time Kuroda returned from Davos, BOJ staff were ready to propose negative rates, taking a leaf from the European Central Bank's book. "The ECB showed that combining QE and negative interest rates can work," one BOJ official said. "It was just a question of overcoming some technical difficulties."
People close to Kuroda say that Davos - where he mingled with central bankers such as ECB President Mario Draghi and leading company executives - likely prompted him to pull the trigger. "Davos is really important. Many central bank governors change their perception of things there," said one central bank policymaker who has regular interaction with Kuroda.
The big challenge was to drive the shock move through his nine-member board.
At least three members remain deeply suspicious of how effective QQE is and strongly oppose further monetary easing. They all voted against on Friday.
That left Kuroda and his two deputy governors having to convince the three swing voters: former academics Sayuri Shirai and Yutaka Harada, and former auto executive Yukitoshi Funo.
Harada backs aggressive monetary easing and has signalled his concern over weak consumption and wage growth, according to recent public remarks, and so would not have been opposed to taking further action. As a board newcomer and advocate of premier Shinzo Abe's "Abenomics" stimulus policies, including QQE, Funo is unlikely to have rocked the boat.
That should have guaranteed a narrow support for Kuroda's move, but winning over Shirai was crucial to convincing markets that Kuroda had a solid majority behind him.
Shirai was a strong advocate of QQE when it was deployed in April 2013, and initially echoed Kuroda's optimism for achieving 2 percent inflation, but since a sales tax hike pushed Japan into recession last year, she has argued that the BOJ should take more time to reach the ambitious inflation target.
"Such doubts (about the success of QQE) may have been enough for Shirai to vote against monetary easing," said one person familiar with the BOJ's thinking, adding:
"It might have been her last revolt," before her term expires in March.
(Reporting by Leika Kihara; Editing by Ian Geoghegan)