Bank of Japan Urged to Pursue Interest Rate Normalisation

Kazuo Ueda, the expected next governor of the Bank of Japan, has urged the central bank to be “creative” with its monetary policy and pursue interest rate normalization if it can sustain its 2 percent inflation target. Ueda’s comments, made during a parliamentary hearing, have been met with anticipation from global investors eager to see how the 71-year-old economist will approach the role of central bank chief.

Ueda acknowledged that it would take time for Japan’s price growth to be maintained at the BoJ’s target level and warned that tightening monetary policy under current conditions could slow the economy, as inflation was not driven by underlying strong demand. He suggested that the BoJ continue easing measures while reducing their side effects.

Government data released on Friday showed that Japan’s core inflation rate, which excludes volatile food prices, climbed to a new 41-year high of 4.2 percent in January. This suggests that the BoJ may be able to sustain its inflation target.

Related Facts

• The Bank of Japan has adopted negative rates and yield curve control under incumbent governor Haruhiko Kuroda.
• The BoJ is the last major central bank still holding on to negative interest rates, currently at minus 0.1 percent.
• The Bank of Japan’s balance sheet has been swollen with massive ETF purchases and Japanese government bonds to keep yields low.

Key Takeaway

Kazuo Ueda, the expected next governor of the Bank of Japan, has suggested that the central bank continue easing measures while reducing their side effects but pursue interest rate normalization if it appears to sustain its 2 percent inflation target. Government data released on Friday showed that Japan’s core inflation rate had climbed to a new 41-year high of 4.2 percent in January, suggesting that the BoJ may be able to sustain its inflation target.

Conclusion

Kazuo Ueda’s comments have been met with anticipation from global investors eager to see how the 71-year-old economist will approach the role of central bank chief. His suggestion that the BoJ should continue easing measures while reducing their side effects but pursue interest rate normalization if it can sustain its 2 percent inflation target seems to be a pragmatic approach to decision-making that draws on the market and economic conditions than ideology.