FILE PHOTO: On January 18, 2023, a guy is seen strolling by the Bank of Japan headquarters in Tokyo, Japan.
TOKYO – The unexpected nomination of scholar Kazuo Ueda by the Japanese government to lead the country’s central bank may increase the likelihood that the yield control strategy will be abandoned.
According to paperwork handed to parliament on Tuesday, Ueda, a 71-year-old former member of the policy board of the Bank of Japan (BOJ), would succeed current president Haruhiko Kuroda, whose second, five-year term expires on April 8.
The change in leadership puts a historical cap on Kuroda’s decade-long experiment in monetary policy, which aimed to shock people out of a deflationary mindset and may eventually cause Japan to unite with other developed countries in favor of higher interest rates.
Ueda is faced with the difficult challenge of normalizing his protracted ultra-easy policy, which has garnered rising public criticism for distorting market function and squeezing bank profitability. Inflation has above the BOJ’s 2% objective.
Analysts anticipate Ueda, who has previously cautioned against the risks of early interest rate increases, to delay tightening monetary policy.
However, given his prior remarks highlighting its possible shortcomings, experts think he may be more eager than his predecessor to roll back yield curve control (YCC), a complicated framework combining negative short-term rates with a 0.5% bond yield restriction.
When formulating monetary policy, Ueda is expected to place a strong emphasis on theory and empirical analysis, according to Naomi Muguruma, senior market economist at Mitsubishi UFJ (NYSE:) Morgan Stanley (NYSE:) Securities.
She stated, “I don’t think he will sustain a strategy that didn’t succeed and is displaying rising side-effects.”
Analysts claim that having Ueda in charge will make it simpler for the BOJ to end its present stimulus program than a candidate like Amamiya, who was instrumental in developing Kuroda’s policies.
The 10-year bond yield cap may be lifted by the BOJ in spring or summer, according to Totan Research’s head economist Izuru Kato.
Whether choosing when to end negative rates, he suggested, the BOJ may wait to watch how inflation and other economies far from home evolve.
According to the documents, the government also proposed former head of Japan’s banking watchdog Ryozo Himino and BOJ officer Shinichi Uchida as deputy governors.
Ueda will preside over his first BOJ policy meeting on April 27–28 following ratification by parliament.
Ueda, a mild-mannered scholar with a PhD from the Massachusetts Institute of Technology, is regarded as a realist with the flexibility to change his opinions on monetary policy.
With inflation running at double the central bank’s objective when he takes over the BOJ, investors have a justification to challenge the 0.5% restriction placed on the yield on 10-year bonds.
Ueda cautioned against raising rates too soon in reaction to inflation that was mostly caused by cost-push factors in an opinion piece published in the Nikkei in July of last year.
He also noted the possible drawbacks of YCC, such as the challenge of maintaining the yield cap as inflation picks up, and suggested that the BOJ finally think about how to end its ultra-loose policy.
After statistics revealed that the recovery in October-December GDP was less than anticipated, several analysts claim that Japan’s flimsy recovery will make the road to departure more difficult.
Takeshi Minami, chief economist at Norinchukin Research Institute, stated that given the weakening of foreign economies, it could be challenging for the BOJ to normalize its ultra-easy policy this year.