In his final appearance at the Bank of Japan in April 2005, Kazuo Ueda said he considered himself lucky to have been a board member at “an extraordinarily difficult time”, as the economy battled a financial crisis and persistent deflation.
Now about to return almost two decades later, Ueda faces an equally daunting but different challenge: preparing to lead a pivot from the longstanding ultra-loose monetary regime that has left the Bank of Japan as the last major central bank clinging to negative interest rates, while its global peers tighten policy to rein in soaring inflation.
The 71-year-old economist, who has been nominated as the bank’s next governor, will seek to slowly transition towards interest rate normalisation under intense scrutiny from global investors. Any missteps from the BoJ — whose policies to hold down interest rates have left it holding more than half of Japan’s government bond market — could destabilise financial markets.
“The new BoJ leadership faces an extremely thorny path ahead,” said Izuru
Kato, a longtime BoJ watcher and chief economist at Totan Research. “There will be no easy exit. It will be extremely difficult to tackle the BoJ’s balance sheet, which has recklessly expanded.”
Prime minister Fumio Kishida is betting that Ueda’s monetary policy expertise will allow him to chart a gradual exit from the BoJ’s unprecedented quantitative easing measures.
“I decided that Mr Kazuo Ueda was the best fit since he is an internationally well-known economist with deep financial knowledge of both theory and practice,” Kishida told a parliamentary committee on Wednesday, in his first public comments on the nomination.
If Ueda is approved by Japan’s Diet in the coming weeks, he will take over in April from incumbent Haruhiko Kuroda, who has battled persistent low inflation with aggressive monetary easing and stimulus.
But the direction Ueda will take in monetary policy remains a major unknown.
In terms of orientation, Ueda, professor emeritus of the University of Tokyo with a PhD in economics from MIT, is neither a dove nor a hawk. Analysts pointed to his voting record on the BoJ board, where he served from 1998-2005, to suggest a pragmatic approach to decision-making that drew more on market and economic conditions than ideology.
“Mr Ueda obviously knows theory very well but he also places importance on markets,” said Nobuyasu Atago, a former BoJ official who is now chief economist at Ichiyoshi Securities, who described the incoming governor as “an ideas man”.
“I think he will be very practical and decide on monetary policy based on actual economic conditions,” Atago added.
Ueda is known for helping introduce forward guidance when the BoJ adopted its zero-interest rate policy in the late 1990s, and opposed lifting that policy in 2000, saying he wanted to wait until stock markets had stabilised.
Toshihiko Fukui, BoJ governor when Ueda stepped down, praised the academic at the time as a “pillar of logic” who understood “central bank spirit”.
The business community has urged the BoJ not to pivot drastically from its ultra-loose monetary easing, fearing currency volatility, while calling on it to unwind record purchases of Japanese government bonds to keep yields low.
In December, the BoJ stunned investors by announcing that it would allow 10-year JGB yields to fluctuate by 0.5 percentage points above or below its target of zero, widening the previous band of 0.25 percentage points.
It has since maintained its target ceiling, but at a cost of bloating its balance sheet with more than $300bn in government bond purchases. The BoJ also holds more than half of all locally listed exchange traded fund assets.
Investors are betting the BoJ will be forced to abandon the yield curve control policy as Japan’s core inflation rate, which excludes volatile food prices, has risen to a 41-year high of 4 per cent.
Atago of Ichiyoshi Securities said he expected the BoJ’s first step to be shortening the target duration of the YCC policy to three years, from 10 years. Goldman Sachs has forecast the YCC shortening to five years in the second quarter of 2023.
Kato at Totan Research said the measure could be dropped altogether by summer while maintaining its quantitative easing with large purchases of JGBs until markets stabilised. He also predicted the BoJ could start shifting its ETFs to a separate entity by the second half of Ueda’s term, which could allow it to attempt an orderly unwinding without upending financial markets.
Ueda has previously warned against premature tightening, noting that the Japanese economy was not yet in a state where the central bank’s inflation target of 2 per cent could be sustainably maintained.
“The BoJ must not rush to radically change the way it has been doing things, and I don’t think that would happen,” Kengo Sakurada, chief executive of Sompo Holdings and chair of the Japan Association of Corporate Executives, said at a news conference on Wednesday.
Another person close to the BoJ suggested Ueda was unlikely to embark on a major policy change until the central bank determined whether this year’s wage negotiations would flow into pay rises next year.
But with an uncertain global economic outlook, Atago said the BoJ might need to entertain additional easing if inflation falls sharply and growth slows.
“For the BoJ, it’s extremely important to consider not only normalisation but also to leave options open,” he said.
As Ueda prepares to become the first outsider at the helm of the BoJ, he will be supported by deputy governors with international stature and deep knowledge of financial markets.
On Tuesday, the government also nominated Ryozo Himino, a well-regarded former commissioner of the Financial Services Agency with a Harvard MBA, and Shinichi Uchida, a BoJ executive who played a central role in shaping monetary policy, as deputy governors. All three are English speakers with ties to the central banking and financial community.
Kishida said he considered factors such as market communication skills and the ability to work closely with global central bank chiefs in choosing the BoJ’s next leadership team.
“It’s an incredible trio,” said one BoJ official.
Additional reporting by Eri Sugiura in Tokyo