Mr. Ueda’s stance differs from Kuroda’s line

The government is poised to present to the Diet on February 14 a personnel plan to appoint former Bank of Japan (BOJ) Policy Board member Kazuo Ueda (Professor at Kyoritsu Women’s University and Professor Emeritus at the University of Tokyo) as the BOJ’s new governor.

There is a sense that financial markets have somewhat mixed views regarding Mr. Ueda’s policy stance. When reports of the proposed appointment first began to circulate, the yen appreciated and long-term interest rates rose on speculation of policy revision. However, Mr. Ueda’s comments to the media that “continued monetary easing is necessary” has led some to believe that he is cautious about making any revisions to monetary easing, and the yen has swung slightly back toward depreciation in the foreign exchange market.

The bottom line is that Mr. Ueda has distanced himself from the policy stance of Governor Kuroda, and once he assumes office, we should expect him to work together with the Secretariat to carefully and gradually review the monetary easing framework and normalize monetary policy. This would indeed be a change from the line that has Kuroda taken.

Will monetary easing be continued, albeit under a revised framework?

Mr. Ueda’s statement that the current monetary easing is appropriate may be aimed at avoiding any major movements in the financial markets on speculation of policy revisions. I’ve long assumed that the new governor would be likely to emphasize from the outset that he wouldn’t make any hasty policy revisions, in consideration of the stability of the financial markets.

Even if the statement that “continued monetary easing is necessary” is true, it would mean that the BOJ is opposed to turning to an explicit tightening of monetary policy, but wouldn’t be opposed to reviewing its policy framework in the course of continuing its accommodative policy stance. For example, eliminating the negative interest rate by raising the short-term policy rate from the current -0.1% to 0.0%, or reducing the amount or balance of Japanese government bond (“JGB”) purchases, would not signal a turn toward tightening monetary policy, although it would be a significant revision of the current policy framework. It would still maintain an accommodative stance while reducing easing.

Mr. Ueda has not been making anti-Kuroda arguments, but rather, like a scholar, he appears to be soberly analyzing the effects and side effects of individual policies. He will likely maintain this attitude when he becomes governor.

Opposed to raising interest rates too hastily

Mr. Ueda argued in the July 2022 edition of the “Economics Classroom” in the Nihon Keizai Shimbun that the BOJ should not follow foreign central banks in raising interest rates too hastily. This article has also served as evidence for those who take the view that Mr. Ueda is cautious about policy revisions.

However, his argument in the article was one of oppositions to the BOJ following the lead of foreign central banks by raising interest rates too hastily, including with the aim of curbing depreciation of the yen in response to inflation exceeding the 2% target. This argument is probably based on the fact that the upturn in prices in Japan is temporary, the attainment of the 2% price target is not yet in sight, and a full-fledged interest rate hike, of the kind being made overseas, could have a negative impact on the Japanese economy. In this respect, it is close to Governor Kuroda’s thinking.

“The future of our extraordinary monetary easing framework will probably need serious consideration at some point”

However, the same article also provides a glimpse of an awareness that the lack of flexibility in the current monetary policy framework is problematic. Furthermore, the article explicitly states that “the future of our extraordinary monetary easing framework will probably need serious consideration at some point”, so it’s not that he agrees with the current policy.

The article also questions the basis for aiming for a sustainable 2% inflation rate in the first place. The appropriateness of the 2% price target will presumably be debated going forward. If the 2% price target is made more flexible, such as by making it a medium- to long-term target, this will lead to revision of the monetary policy framework and a reduction in monetary easing.

The BOJ’s quantitative easing measures, which involve massive purchases of JGBs, have shown themselves to be effective when linked to increased government spending (so-called helicopter money), but Mr. Ueda has long indicated a negative view on the effectiveness of the BOJ’s JGB purchases alone.

However, JGB purchases linked to increased government spending is nothing more than “government financing,” and there are many problems with it, such as the fact that it can significantly loosen fiscal discipline. Mr. Ueda may have a strong sense that the BOJ’s current asset purchase measures are problematic.

Even under Governor Kuroda, “de-facto normalization” has been proceeding at the initiative of the Secretariat

Even under Governor Kuroda, who has been aggressive about monetary easing, the BOJ Secretariat is believed to have pursued “de-facto normalization” aimed at reducing side effects by making policy more flexible in some areas. Under the new governor, who has distanced himself from Governor Kuroda’s stance, this trend is expected to accelerate and turn into more “explicit normalization.”

While Mr. Ueda is an academic specializing in monetary policy, he also served as a member of the BOJ Policy Board for seven years from 1998 to 2005. In other words, he was selected for his expertise in monetary policy from both theoretical and practical perspectives. However, it is very likely that this was something that the BOJ recommended. It also probably reflects the inclination of the Secretariat, which has been pushing “de-facto normalization” under Governor Kuroda.

Mr. Ueda is expected to work together with the Secretariat to examine and revise the monetary policy framework. Mr. Ueda’s aptitude for dealing with the Diet and politics remains to be seen, and he will need strong support from the Secretariat in many respects. In exchange for the cooperation of the Secretariat in these areas, Mr. Ueda is likely to be flexible in incorporating the wishes of the Secretariat in policy management.

Mr. Ueda has maintained close ties with the BOJ to this day, including serving as a special advisor to its Institute for Monetary and Economic Studies after stepping down as a member of the Policy Board. While much attention has been given to the fact that this is the first postwar governor to come from an academic background, the BOJ probably welcomes the prospect of having someone very close to it as governor again.

Restoring flexible and agile monetary policy

In his briefings to the media, Mr. Ueda has also stated that he considers monetary policy by looking at the economy and prices. This indicates the essence of monetary policy, which is to make trajectory adjustments to monetary policy in response to changes in the economic environment.

However, such flexible policy management is not possible under the current monetary easing framework. Therefore, it’s expected that the current framework will be modified to make it more flexible even while an accommodative monetary stance is maintained.

On the other hand, if the focus of monetary policy decisions is on the economy and prices, then the thinking would be not to forcibly proceed with policy revisions while the economy, prices, and the financial environment are facing headwinds. From this point of view, he and the BOJ probably won’t be in a hurry to force policy revisions while the domestic and overseas economies are slowing down, and the U.S. Federal Reserve’s monetary tightening measures are nearing their end and speculation of a rate cut could soon spread, which could increase pressure on the yen to appreciate.

In response to the yield curve control (YCC) review on December 20 last year, some in the financial markets expected a policy rate hike as early as April, but it’s thought that the likelihood of such a hike will be considerably reduced once Mr. Ueda takes office.

Prospects for policy normalization going forward

The new governor is facing a mountain of challenges.

The first thing that the BOJ undertakes in monetary policy under a new governor will probably be a major overhaul of the YCC, possibly by further expanding yield volatility or eliminating the volatility range. This would be implemented in April of this year at the earliest.

The second will be revising the 2% price target to a medium- to long-term target, for example, to restore flexible monetary policy and create an environment conducive to normalization. The earliest possible implementation for this could still be April of this year in the form of a revision of the joint statement, but in reality, actual implementation may be delayed given the time required for coordination with the government or between the government and the LDP. In any case, these two points are expected to be implemented by the end of 2023.

The third will be eliminating negative interest rates and the YCC, which will be implemented only once the economic and financial environment has improved, probably after mid-2024. After that, quantitative tightening measures, such as reducing the balance of JGB holdings, and off-balancing ETFs are expected to be implemented over the next several years.

The normalization of monetary policy will not be completed during the term of the new Governor Ueda, and future BOJ governors will also have to shoulder the heavy burden of policy normalization.

• Takahide Kiuchi

  Executive Economist