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BOJ chief nominee sticking to familiar playbook, at least for now

Bank of Japan governor nominee Kazuo Ueda is signaling that financial markets should not expect big surprises or magical solutions, as he braces for the monumental challenges facing the central bank.

His carefully worded statements on monetary policy in his recent confirmation hearings in parliament suggest he will prioritize communication with financial markets and make his thinking behind policy decisions clear.

Ueda, 71, has cast himself as a future BOJ policymaker, who would be realistic, flexible, and also creative in guiding monetary policy after a decade of monetary easing under incumbent Haruhiko Kuroda has exposed its side effects.

For now, he said the BOJ’s monetary easing is appropriate and should continue as its 2 percent inflation target has yet to be attained in a stable and sustainable way.

Still, the academic and former BOJ board member has left hopes alive for a review of the central bank’s program to keep borrowing costs low to support the economy, known as “yield curve control.”

Market participants have taken Prime Minister Fumio Kishida’s surprise selection of Ueda as a sign of a gradual departure from the late former premier Shinzo Abe’s “Abenomics” economy-booster program that had bold monetary easing as a key pillar.

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

“What matters is how things get off to a start, so April will be key,” he added, referring to the BOJ’s first meeting to be held under its new governor next month.

In response to questions from lawmakers in both houses of parliament, Ueda took the view that the BOJ is still seeking to examine the effect of a December decision to raise the ceiling on 10-year Japanese government bond yields, which stunned financial markets.

The move fueled market expectations of further tweaks down the road and a shift to a tighter monetary policy despite the central bank’s insistence that it was aimed at fixing market distortions. The market views added upward momentum to 10-year bond yields and the BOJ has had to ramp up bond buying to defend the ceiling as the decision apparently backfired. Bond prices and yields move inversely.

Adopted in 2016, YCC sets short-term interest rates at minus 0.1 percent and guides 10-year bond yields around zero percent. Ueda, who will take the helm of the BOJ in April if parliament gives the go-ahead this month, only said he will take time and determine “what it should look like” in consultation with BOJ staff and other board members.

Ueda did not make outright commitments that would limit room for future policy maneuver, largely playing it safe but also giving certain reassurances to both proponents and critics of monetary easing under Kuroda, the BOJ’s longest-serving governor.

“Mr. Ueda so far fended off pressure from politicians demanding a continuation of reflationary policy. But his statement that he will put the finishing touches to the mission of attaining price stability shows his resolve to eventually begin an exit strategy,” Kumano said.

Improving economic conditions, especially accelerating inflation in Japan, are also strengthening the view among some market players that a policy change is in the offing.

Japan’s key gauge of inflation, the core consumer price index excluding volatile fresh food items, was at a 41-year high of 4.2 percent in January and stayed above the BOJ’s 2 percent target for 10 months.

If the inflation rate is expected to reach 2 percent, “We will have to normalize powerful monetary steps that are in place. At this point, however, I refrain from explaining what that means, when and how we will normalize them,” Ueda said, as he expects the core CPI to fall below the target later this year.

Market participants expect 10-year Japanese government bond yields to hit 0.67 percent on average at the end of June, higher than 0.5 percent forecast in March, according to a BOJ survey of financial institutions.

The would-be governor also said that the 2 percent inflation target and a 2013 statement committing the BOJ to attaining the goal as soon as possible should be maintained at least for the time being. Some experts and lawmakers have demanded that they be changed, which would signal a break with the Kuroda era.

Hiroshige Seko, a ruling party lawmaker and supporter of Abe’s reflationary policy mix, said revising the accord would be like opening Pandora’s box. “How determined are you that you will carry on with Abenomics?” Seko pressed Ueda during a confirmation hearing.

Ueda said he is keenly aware of the gravity of the challenge facing the BOJ that does not allow for “wrong judgments” by the next governor, adding he wants to utilize his experience as a board member and academic. Ueda, who taught as a professor at the University of Tokyo, is currently teaching at Tokyo’s Kyoritsu Women’s University.

“At the end of the day, how the BOJ wants to remove YCC and communicate it (to financial markets) is important,” said Toru Suehiro, chief economist at Daiwa Securities, adding that scrapping YCC will not come before this summer.

Economists at Daiwa Institute of Research estimate that doubling the current range of minus 0.5 percent and 0.5 percent for 10-year bond yields will push down real gross domestic product by around 0.2 percent. If YCC is scrapped, GDP will suffer a bigger negative impact of 0.5 percent.

Ryutaro Kono, chief Japan economist at BNP Paribas in Japan, said the 10-year yield ceiling could be raised to 1 percent at a policy-setting meeting from Thursday, Kuroda’s last.

“If Governor Kuroda makes up his mind, it will enable the new leadership under the next chief Ueda to guide monetary policy more smoothly.”

Source: japan today