BOJ’s Newly Appointed Leader Ponders on Low Rates Amidst Current Economic Climate
Bold Move by Incoming BOJ Governor: Maintaining Ultra-Low Interest Rates Despite Inflation Rise
After being named the next Bank of Japan (BOJ) Governor earlier this month, Kazuo Ueda faced his first public hearing with lawmakers who probed him about his plans for the country’s monetary policy, to the surprise of many, Ueda defended the bank’s ultra-low interest rate policy, despite inflation rates exceeding the BOJ’s target of 2% for five consecutive months.
Continuity in Policy: Ueda’s Emphasis on Patience
Ueda emphasized the need for patience and continuity in policy, especially as Japan’s economy remains fragile amid the global pandemic. Despite inflation being driven by increased raw material import costs rather than strong demand, Ueda warned against the dangers of responding with monetary tightening. He cautioned against acting preemptively to supply-driven inflation but was optimistic that Japan’s trend inflation would rise gradually.
No Rush to Overhaul Controversial Policy
While Ueda acknowledged the various side effects of the BOJ’s current policy, particularly its bond yield curve control (YCC), he signaled that he would not rush to overhaul this controversial policy. Instead, he said they needed to work out the right timing and means to do so. Ueda’s cautious approach to YCC represents a bold move as it has drawn public criticism for distorting market functions and crushing banks’ margins.
Global Bond Yields Fall and Japanese Stocks Rally
Ueda’s comments positively affected the global bond yields as they fell, and Japanese stocks rallied. Although the yen was volatile, it ultimately settled at 0.03% against the dollar. These market reactions indicate that Ueda’s emphasis on patience and continuity in policy tempered some market expectations that he might seek to make a hasty exit from the BOJ’s extreme monetary stimulus of his dovish predecessor.
Related Facts
- Ueda faces the delicate task of phasing out YCC policy as inflation exceeds BOJ’s target.
- The government’s surprise selection of a 71-year-old academic was initially seen as a heightening chance of ending an unpopular YCC policy.
- Career central banker, Shinichi Uchida, warns against tweaking ultra-loose policy to deal with its side-effects.
Key Takeaway
Ueda’s bold move to maintain ultra-low interest rates despite rising inflation rates is a calculated one that prioritizes continuity in policy over anything else. Moreover, his emphasis on patience demonstrates his long-term commitment to cautiously addressing Japan’s fragile economy. As such, he has quelled market concerns about sudden shifts in policy that could result in significant unintended consequences.
Conclusion
The confirmation hearing of Kazuo Ueda has demonstrated his inclination to maintain continuity in the BOJ’s policy concerning interest rates, despite rising inflation rates. Furthermore, his deliberate approach to YCC indicates his recognition of its undesirable effects while acknowledging the need to work on the right timing and means to overhaul it. This measured approach is critical today, with the world continuing to grapple with the pandemic’s far-reaching impacts.
