TOKYO – Kazuo Ueda used his big moment in the spotlight on Friday to assure Bank of Japan watchers he’s no Peter Pan.
One of the cringiest moments of predecessor Haruhiko Kuroda’s 10 years as BOJ governor came in 2015, when he spelled out his strategy to reanimate Asia’s second-biggest economy.
“I trust that many of you are familiar with the story of Peter Pan, in which it says, ‘The moment you doubt whether you can fly, you cease forever to be able to do it.’” In summing things up, Kuroda said: “Yes, what we need is a positive attitude and conviction.”
As Kuroda prepares to retire in April, Ueda is telling members of the Diet, the country’s parliament, that he sees no supernatural silver bullet to end Japan’s multi-decade malaise.
“If I’m appointed BOJ governor,” Ueda told lawmakers on Friday, “my mission isn’t to come up with some kind of magical, special monetary policy.”
Ueda noted that “as I’ve mentioned before, if you look at the trend in prices, there are improvements we’re seeing, but the situation remains that it’ll still take some time until we’ve securely achieved 2% inflation.”
With those words, speculation that Ueda is some monetary maverick ready to shake up world markets fell to earth. Loudly, too.
Ueda made clear that his policies are data-dependent, not driven by some preordained agenda to start raising interest rates.
“If another clear step up in improvement in the outlook for the price trend comes into sight, we’ll inevitably have to think about a review of yield curve control or a move in the direction of policy normalization,” he told lawmakers.
In the interim, Ueda also admitted it may be “appropriate” for the BOJ to continue easing if need be. “It’s true there are various side effects emerging from the stimulus,” he told lawmakers. “But the BOJ’s current policy is a necessary, appropriate means to achieve 2% inflation.”
After Ueda’s Diet appearance, “we think the risk scenario in which a revision” of the BOJ’s years-long approach “resulting in sharp yen appreciation and a rise in deflationary pressure, is now less likely to occur,” said economist Takeshi Yamaguchi at Morgan Stanley MUFG.
Normalization resisted
At least one thing is clear: Ueda’s baptism by fire began in earnest on Friday. Once Kuroda leaves the scene, Ueda will have to hit the ground running.
This week, restless markets showed the Massachusetts Institute of Technology–trained economist what’s at stake. Traders attacked the BOJ’s cap on bond yields, a signal it’s time to end the 20-year-plus quantitative-easing (QE) campaign.
Yet it’s far from clear that Tokyo officialdom is ready for the BOJ to normalize monetary policy. Much of the questioning from lawmakers centered on a unified message: Be careful, Ueda-san, Tokyo isn’t as ready for less supportive BOJ policy as markets believe.
One clear area of tension: the upcoming Shunto wage negotiations between unions and companies. Larger ones are seen announcing pay-increase plans in mid-March, while smaller ones will report on April 1.
In recent years, this annual so-called “spring offensive” has been a complete snoozer. The fabled salaryman hasn’t had a string of statistically notable raises in 30 years. This year will be different amid drum-tight labor markets and the highest inflation in 40 years.
Lawmakers worry BOJ “tapering” could sabotage workers’ first big chance at a wage increase since QE policies began in 2000 and 2001. Their not-so-subtle warning to Ueda – and Kuroda – is not to ruin the party.
It’s a catch-22 few central banks have even had to confront. Since before Kuroda grabbed the reins in 2013, QE efforts aimed to generate a virtuous cycle of organic wage gains that sparked a domestic-demand-led recovery. Kuroda, of course, turned the endeavor up to 11, and then some.
But Kuroda’s hoarding government bonds, private-sector stocks and other assets fell short. Though corporate profits hit post-bubble-economy highs, chief executives neglected to share them with workers.
Meanwhile, the inflation surge Japan is now experiencing has nothing to do with organic or sustainable domestic demand. Japan’s roughly 4% inflation rate is the product of elevated commodity prices due to Russia’s invasion of Ukraine.
This only adds to the BOJ’s conundrum. The forces behind today’s inflation are largely beyond its control. Ending QE and telegraphing a rate increase would do more to slam Japan Inc’s confidence than tame consumer prices.
What’s needed, of course, is a supply-side big bang that cuts bureaucracy, increases productivity and rekindles Japan’s innovative spirits. But a quarter-century of zero rates and 20-plus years of QE deadened the urgency for the government and chieftains to change course.
Ueda now has the unenviable task of forging a different path. Kuroda could have made things easier by beginning the pivot on his way out the door.
On December 20, Kuroda tested the waters with a slight tweak in the BOJ’s yield-curve control strategy. That day, he announced an increase in the band for 10-year rates to 0.5%. It caused a mini-earthquake in global markets and sent the yen skyrocketing.
But Team Kuroda flinched. The BOJ has spent the last two months doing damage control. It has made countless unscheduled bond purchases to cap yields and the tame yen exchange rate.
This dynamic has markets testing the BOJ’s resolve. Yet odds are that investors will have to wait until Ueda arrives in April to see whether a policy U-turn is possible.
Kuroda will likely be reluctant to blow up next month’s wage negotiations. He made 3% wage growth a precondition to exiting ultra-easy monetary policy. As such, Kuroda may be loath to botch the endgame as workers stand to get their biggest pay hikes since 1997.
Economist Yasunari Ueno at Mizuho Securities flags another complicating factor: Japan Inc closes its books at fiscal year-end in March. Any shift in policy in the short term “could hit companies” at a pivotal moment for Asia’s No 2 economy, Ueno notes.
Hence the seemingly impossible balancing act facing Ueda when he arrives at BOJ headquarters. Friday’s theatrics in parliament are a reminder that the ruling Liberal Democratic Party will be looking over Ueda’s shoulder early and often.
The BOJ, remember, has never been as independent as the US Federal Reserve. The powerful Ministry of Finance still has great sway over BOJ decisions – and how much rope to give the governor du jour.
At the same time, rumors that Ueda might be some monetary maverick seem greatly exaggerated. During his time as a BOJ board member from 1998 to 2005, he tended to be a voice for stability, not risky policy shifts.
“Ueda’s long association with the bank, and his past endorsement of the expansive monetary policy, means there are no radical changes on the horizon,” says Nobuko Kobayashi, Asia-Pacific strategy leader at EY. “He’s largely seen as a continuation” of the Kuroda era.
That said, Kobayashi notes, the BOJ’s “decade-long quantitative easing has had unwelcome side effects on the Japanese economy. And with consumer prices rising sharply due to supply-side pressure, the bank may have to consider changing its policy soon.”
One key “signpost,” she says, is whether wages “grow sustainably faster than inflation” or signs emerge that “the real economy is back on its feet.” These, Kobayashi adds, “could make rate rises more attractive to Mr Ueda.”
Frédéric Leroux, a top investment committee member at Carmignac, says the “days of yield curve control are numbered, as are those of a rate curve that has been out of touch with economic reality for too long. In this context, the chosen leader takes second place. What counts is the respect of the mandate of the institution it represents: the stability of the Japanese financial system.”
Leroux observes that Ueda, 71, attended MIT at the same time as former Fed chairman Ben Bernanke, when former Fed and International Monetary Fund bigwig Stanley Fisher was teaching there. As such, Leroux says, it’s “fair to say” that Ueda “has an academic view of monetary theory and central banking.”
In practice, though, Ueda’s policy decisions could be the most impactful among Group of Seven economies this year. Such “monetary normalization,” Leroux says, will be a “game changer after 30 years of almost uninterrupted deflationary pressures. It deserves our full attention and interest.”