The EconomistFebruary 24th 2018 Finance and economics 632 in a crisis).
Nevertheless, the bank that Mr Gulliver
hands over to John Flint, anotherHSBClif-
er (28 years and counting), is in fair shape.
The balance-sheet, at $2.5trn, is roughly as
big as it was when he took over at the start
of 2011. But it is safer. Risk-weighted assets
(RWAs) have shrunk by more than 20%.
The ratio of equity to RWAs, a key measure
of capital strength, is a robust 14.5%. Invest-
ment banking, which accounted for half of
profit in 2010, now contributes 28%, a bit
less than retail banking and wealth man-
agement, the division Mr Flint used to run,
and corporate banking.
Mr Flint also inherits two other things.
One is a bank freed of some long-standing
legal snares. Most recently, in December a
five-year-old deferred-prosecution agree-
ment (DPA) with America’s Department of
Justice, imposed after Mexican drug gangs
laundered $881m through HSBC, expired
and charges were dropped. The DPAhad
included a fine of $1.9bn and close, contin-
uous monitoring by regulators.
The other is a big beton Asia, where the
Hongkong and Shanghai Banking Corpo-
ration was born—in Hong Kong in 1865. In
2015 Mr Gulliver announced among other
things an investment in the Pearl River Del-
ta, a Chinese economic hotspot. The bank
has 24 teams supporting Chinese business-
es abroad, 20 of them in cities along the
routes of China’s Belt and Road Initiative,
an infrastructure plan that seeks to im-
prove trade links. Asia already accounts for
three-quarters of profits.
With Mark Tucker, the newish chair-
man and a former head ofAIA, a big Asian
insurer, Mr Flint is likely to follow Mr Gulli-
ver’s eastward course. Last year Mr Tucker
succeeded Douglas Flint (no relation to
John) with whom Mr Gulliver formed a
successful double act.
Mr Flint has said he will lay out his
plans in a few months. They may reflect a
review ofHSBC’s North American busi-
ness, which accounts for 16% of assets but
just 8% of profit, and which in 2007 gave
out the first loud distress signal of the fi-
nancial crisis, having seen subprime mort-
gages turn sour. Manus Costello of Auton-
omous, a research firm, thinks buying an
asset manager would be wise. A wave of
recent deals indicates the importance of
scale in that business, in which he says
HSBCranks only 45th in the world.
The new boss has other work to do.
HSBC’s legal woes are not entirely over.
This week it noted that investigations into
possible tax-dodging by clients, notably at
its Swiss private bank, could yet entail pen-
alties of $1.5bn or more. Also troubling is
that return on equity, the banking indus-
try’s main measure of profitability, is a
mere 5.9%. Mr Gulliver had set a target of
more than 10%, a marklast reached in 2011.
Rising interest rates should at least put
wind into Mr Flint’s sails. 7
G
OVERNORS of the Bank of Japan (BoJ)
tend not to linger long in their post.
Twenty-two people have headed the insti-
tution since 1914, compared with 16 at the
Federal Reserve and 12 at the Bank of Eng-
land. The lasttime a BoJ governor won a
second term was 1961, when Japan’s econ-
omy was growing by over 11% and inflation
was over 5%. As Richard Werner, the au-
thor of “Princes of the Yen”, a historyof the
central bank’s failures, points out, by tradi-
tion the job alternates every five years be-
tween a candidate backed by the finance
ministry and a “true-born” BoJ insider.
This tradition will be broken by the re-
appointment of Haruhiko Kuroda, who
was nominated for a second term on Feb-
ruary 16th. If he completes it, he will be-
come the longest-serving governor in the
BoJ’s history.
With luck that might be long enough for
him to reach the central bank’s elusive in-
flation target of 2%, a goal set five years ago
which he had hoped to meet by 2015. Al-
though the BoJ has bought assets lustily
with freshly created money, core inflation,
excluding fresh food and energy, was only
0.3% in the year to December. Mr Kuroda
hopes that low unemployment will even-
tually force firms to raise wages and prices,
which will in turn raise expectations of in-
flation in the future, reinforcing its momen-
tum. The yen should also help. Although it
has strengthened by about 4% this year on
a trade-weighted basis, it remains much
cheaper than it was in the summer of 2016.
The window for success may close rath-
er earlier than 2023, however. The govern-
ment plans to raise Japan’s consumption
tax from 8% to 10% in October next year. Mr
Kuroda supported the last such increase in
April 2014, arguing that Japan’s public fi-nances needed help and Japan’s recovery
could withstand the blow. That proved to
be a mistake. The central bank’s monetary
easing failed to prevent a sharp drop in de-
mand, partly because Japan’s private sec-
tor proved surprisingly willing to hold,
rather than spend, the extra money Mr Ku-
roda created. But that willingness to hold
safe assets (whether money or sovereign
bonds) means Japan’senormouspublic
debt remains surprisingly easy to sustain.
The government may try to offset the next
tax increase by raising social spending at
the same time. But the increase still poses a
threat to Japan’s economic momentum.
Mr Kuroda also worries that his policy
of negative interest rates, announced in
January 2016, may eventually turn
counterproductive. The cut in rates raised
the value of long-term assets held by Ja-
pan’s banks, improving their balance-
sheets. But thisone-time benefitmust be
set against an ongoing cost: negative rates
hurt the margin that banks earn between
the interest rates they charge their borrow-
ers and the lower rates they pay for their
funding. Since banks have not been able to
pass on negative rates in full to their depos-
itors, their funding costs have fallen less
than their loan rates. This narrower margin
could erode their financial standing and
eventually inhibittheir lending.
There is, however, “no evidence that
such a thing is happening in Japan”, Masa-
zumi Wakatabe, an economist at Waseda
University in Tokyo, told Bloomberg, a
news agency, in December. The improve-
ment in the economy has increased the
creditworthiness of borrowers, obliging
banks to write off fewer bad loans. And
bank lending grew apace after negative
rates were introduced in January 2016 (see
chart), even as firms have taken advantage
of low borrowing costs to issue more of
their own bonds and commercial paper.
Mr Wakatabe’s view that the BoJ
should not “exit” too soon from easing
seems to be shared in high places. He was
also nominated on February 16th to serve
alongside Mr Kuroda as one of his new
deputy governors. The other deputy will
be Masayoshi Amamiya, a central-bank in-
sider known as “MrBoJ”, who has worked
to implement Mr Kuroda’s policies. Many
think Mr Amamiya could eventually suc-
ceed Mr Kuroda as governor. He might
even be the bank’s first boss since 1989 to
inherit inflation above 2%. That would be a
welcome break with recent tradition. 7The Bank of JapanKuroda ain’t over
Japan’s central bank chooses continuity over traditionNon-negativeSource: Haver AnalyticsJapanese outstanding bank loans and
corporate bonds, % change on a year earlier2011 12 13 14 15 16 17 184202468+Domestic-bank loansCorporate bonds