Navigating the Challenge of Withdrawing from Japan’s Loose Monetary Policy
Navigating the Challenge of Withdrawing from Japan’s Loose Monetary Policy
Japan’s new central bank governor, Ueda Kazuo, is facing a precarious situation as he prepares to take over the reins of the world’s third-largest economy in April. With the market indicating an end to Abenomics’ ultra-easy monetary policy, any errors by the surprise appointee may spark an unfavorable financial reaction. After almost a decade in office, appointing a suitable replacement for the Bank of Japan’s longest-serving governor, 78-year-old Kuroda Haruhiko, was never going to be a simple task for the Kishida administration. Market watchers expected Deputy Governor Amamiya Masayoshi as the government candidate, with other potential choices being former deputy governors Nakaso Hiroshi and Yamaguchi Hirohide. However, news that 71-year-old Ueda, an academic economist, and dean of the business studies department at Kyoritsu Women’s University, won the race shocked financial markets with the Japanese yen surging in value against the US dollar Japanese government bond yields also rose as traders analyzed the news.
BOJ governors usually come from the ranks of former Ministry of Finance bureaucrats or long-serving BOJ officials. Yet, Ueda is not a complete newcomer to the central bank, having served on the BOJ’s nine-person policy board from 1998 to 2005. The appointment of Ueda’s deputies as former Financial Services Agency chief Himino Ryozo and BOJ executive Uchida Shinichi replaces Amamiya and Wakatabe Masazumi. Meanwhile, economist Okina Yuri, an outside contender, missed out. Unlike its counterparts in Europe and the United States, the BOJ has never had a female governor or deputy.
According to Nikko Asset Management’s chief global strategist, John Vail, Ueda’s appointment constitutes “a large change in tradition, as normally BOJ professionals alternate with MOF ones as governor, but not in terms of continuity.” He also highlighted that “not only does Mr. Ueda have strongly dovish perspectives, but the deputy governor for monetary affairs, Mr. Uchida, was the chief designer of YCC [yield curve control] and the negative interest policies,” Vail pointed out. “So, policy should not change too much in short to intermediate term.”
The BOJ’s YCC policy aims to maintain the yield on 10-year Japanese government bonds within 0.5 percentage points of zero while keeping short-term rates negative. However, the BOJ has been forced to escalate bond buying to defend its policy cap, attracting criticism for distorting market pricing and crushing banks’ margins.
Like other central bank governors globally, Ueda’s first challenge will be rebuilding confidence in the bank’s ability to control inflation. BOJ policymakers have frequently emphasized the need to maintain the ultra-loose policy until consumer prices consistently reach the bank’s 2% target. This pledge formed part of Kuroda’s 2013 “accord” with former Prime Minister Abe Shinzo. Yet, in January, nationwide core consumer prices rose to a 41-year high, increasing by 4.2% from a year earlier, while wholesale prices jumped by 9.5%.
Related Facts:
– In 2019, Japan’s GDP contracted by 4.8%, its worst decline in five years, which hit the economy even before the coronavirus pandemic.
– Kuroda’s Abenomics policies, named after ex-Prime Minister Shinzo Abe, underscore the BOJ’s monetary policy during the past eight years, characterized by record-low interest rates and massive asset purchases.
– As the first academic to head the BOJ in half a century, Ueda is expected to stick to his research-based approach to monetary policy, emphasizing the promotion of fiscal and monetary coordination.
Key Takeaway:
Japan’s newly appointed central bank governor, Ueda Kazuo, faces the tricky task of taking over the reins of the world’s third-largest economy in April as the market signals an end to Abenomics’ ultra-easy monetary policy. Any mistakes by the surprise appointee could trigger an unfavorable financial reaction. Although Ueda’s appointment constitutes a significant shift in tradition, market experts believe that policy should not change too much in short to intermediate term. However, the BOJ’s YCC policy has been criticized for distorting market pricing and crushing banks’ margins. Therefore, Japan’s new central bank governor’s first challenge will be restoring confidence in the bank’s capacity to control inflation in the economy.
Conclusion:
Japan’s newly nominated central bank governor, Ueda Kazuo, is preparing to take up the reins of the world’s third-largest economy. Although his appointment has caused a massive shift in tradition, market watchers believe the policy should not change too drastically in the short term. Instead, inflation control will be one of its top priorities as it seeks to administer a monetary policy that successfully navigates the country through the financial turbulence caused by the pandemic.
