Bank of Japan Governor Nominee Signals Pragmatic Approach to Monetary Policy

Recently, Bank of Japan governor nominee Kazuo Ueda hinted that financial markets should not expect big surprises or magical solutions as he prepares to lead the central bank in tackling the significant challenges ahead. He emphasized that he plans to prioritize communication with financial markets and make his policy decision-making transparent.

Ueda sees himself as a future policymaker for the BOJ who will be realistic, flexible, and creative in guiding monetary policy after many years of monetary easing under current governor Haruhiko Kuroda. Ueda believes that the BOJ should continue its monetary easing policy as inflation targets have yet to be consistent and sustainable.

However, the academic and former BOJ board member has not closed the door on the possibility of evaluating the central bank’s program to lower borrowing costs to support the economy, known as “yield curve control.”

Market Responds to Ueda’s Selection

Market observers have interpreted Prime Minister Fumio Kishida’s choice of Ueda as suggesting a gradual departure from the former prime minister Shinzo Abe’s “Abenomics” program, which relied heavily on bold monetary easing policies.

“Mr. Ueda wants to overhaul YCC by looking at (upcoming) economic data, particularly wages, which will certainly become a defining moment,” said Hideo Kumano, a chief executive economist at Dai-ichi Life Research Institute.

Ueda only stated that he would take his time to determine what changes should be made to the YCC program and consult with BOJ staff and other board members first.

The Effect of December’s Ceiling Increase on Bond Yield

In his confirmation hearings at both houses of parliament, Ueda explained that the BOJ is still examining the effects of the December 2021 decision to raise the ceiling on 10-year Japanese government bond yields, which shocked financial markets.

The market reacted negatively to the decision, expecting additional adjustments and shifting to a tighter monetary policy despite the BOJ’s assurance that it was meant to address market distortions. As a result, the bond prices and yields moved inversely, and the BOJ had to increase bond buying to support the ceiling.

Related Facts

• YCC policies were first implemented in 2016 to offset the impacts of the persisting negative interest rates on the Japanese economy.
• Japan’s core consumer price index, which excludes volatile fresh food items, is at a 41-year high of 4.2 percent.
• Ueda does not want to limit his policymaking to future decisions, as he aims to institute an exit strategy to reflationary policies eventually.

Key Takeaways

• Ueda wishes to communicate transparently with financial markets and prioritize policy delivery.
• According to Ueda, the BOJ’s monetary easing policies should be appropriate and continue.
• YCC policies may be subject to evaluation, particularly concerning wage data, according to Ueda.

Conclusion

The Bank of Japan’s new governor nominee, Kazuo Ueda, aims to provide consistency and transparency in policy delivery. In addition, he seeks to be pragmatic and creative in implementing monetary policies and recognizes the need to coordinate with financial markets.