Is the New Bank of Japan Governor Up to the Task?

The government has presented economist Ueda Kazuo as its candidate for the new Bank of Japan (BOJ) governor. He will need to be approved by both chambers of the Diet, but with the ruling party having a majority, this is unlikely to be a problem. Ueda is a widely respected economist specializing in finance with considerable practical experience. However, the BOJ’s new governor will face enormous challenges, given the failure of his predecessor’s monetary easing policies and other structural problems.

Challenges Facing the New BOJ Governor

There had long been speculation about who would replace incumbent BOJ Governor Kuroda Haruhiko, known for coming up with “unprecedented monetary easing” policies. Many observers felt that the choice of his successor would determine the fate of Kuroda’s signature policy. Ueda will have to tackle the following structural issues:

Price Stability Target of 2%

The BOJ failed to achieve its joint price stability target of 2% with the government for years. The 2% target was finally exceeded in April 2022 due to rising imported energy prices, not monetary policies. The expansion of base money through massive purchases of government bonds that began in April 2013 didn’t have the expected effect. The BOJ’s purchase of government bonds has created problems with loosening monetary discipline.

Negative Interest Rates

The negative interest rate, introduced in January 2016, takes a fee from some deposits with the BOJ held by financial institutions, with an associated hit on profitability, for which the bank has also been criticized.

Yield Curve Control

The BOJ introduced yield curve control in September 2016, which means it controls short-term and long-term rates to some degree. However, the limitations of this approach have become evident, hindering the functions of financial markets and making them susceptible to speculators.

Exchange-Traded Funds

The BOJ will also need to address the large quantities of exchange-traded funds (ETFs) it has been buying. If the BOJ tries to reduce its holdings by selling them, stock prices may plummet.

Related Facts

• Scholars have not been appointed governors since World War II, as the traditional appointment pattern has always been from within the Ministry of Finance or the BOJ itself.
• The BOJ governor’s appointment will determine Japan’s economy’s future direction.
• The choice of ushering in a scholar as governor demonstrates Japan’s focus on choosing the most qualified candidate for the role.

Key Takeaway

The BOJ’s new governor faces significant challenges due mainly to the failure of the BOJ’s current policies. The BOJ has been criticized for loosening monetary discipline, hindering the functions of the financial markets, and being susceptible to speculators. These issues must be tackled to steer Japan’s economy in the right direction.

Conclusion

The appointment of Ueda Kazuo presents hope that the BOJ can take a new direction, as he is a widely respected economist with practical experience. However, the new governor will have numerous challenges to tackle to steer Japan’s economy in the right direction. Key issues include reaching the price stability target, addressing negative interest rates, controlling yield curves, and tackling ETFs. Therefore, the new governor must be up to the task of facing these significant challenges and steering Japan’s economy in the right direction.