Kazuo Ueda appointed to lead Japan’s central bank in possible departure from ultra-easy policy

Hong Kong

The Japanese government has appointed Kazuo Ueda to head its central bank, in a surprise move that could pave the way for the country to ease its ultra-loose monetary policy.

If appointed, Ueda – a 71-year-old university professor and former Bank of Japan (BOJ) board member – would succeed Haruhiko Kuroda, the head of the country’s longest-serving central bank and the architect of its current curve control policy. yield (YCC). . His term ends on April 8.

Ueda’s nomination must be approved by both houses of parliament, each currently controlled by the ruling coalition, before Prime Minister Fumio Kishida’s government can formally nominate him for a five-year term.

Kazuo Ueda speaks during the Institute of International Finance (IIF) Spring Meeting in Tokyo, Japan, on Tuesday, May 9, 2017.

Analysts believe Ueda’s appointment could increase the chances that the BOJ will exit its prolonged ultra-easy monetary policy, which is increasingly difficult to maintain at a time when inflationary pressure is rising and other central banks are aggressively raising rates. .

“Investors see Ueda-san’s selection as a signal to pave the way (for the BOJ) to move away from ultra-loose policy,” said Ken Cheung, chief Asian currency strategist at Mizuho Bank.

“(The) chance of ending yield curve control policy and negative interest rate(s) has been increasing,” he said, but adding that the BOJ’s monetary policy is likely to remain “accommodative”.

The interest curve control policy is one of the pillars of the Central Bank’s effort to keep interest rates low and stimulate the economy.

Accommodative is a term used to describe monetary policy that adjusts to adverse market conditions and generally involves keeping interest rates low to stimulate growth and employment.

The BOJ has implemented an ultra-easy policy since Kuroda took the reins in 2013. In 2016, after years of aggressive bond buying without managing to raise prices, he introduced the yield curve control program, where he bought targeted amounts of bonds to push down yields in order to fuel inflation and spur growth.

As part of that program, the central bank has targeted some short-term interest rates at ultra-dovish minus 0.1% and has targeted 10-year government bond yields at around 0%.

But how do prices rose and interest rates elsewhere rose, pressure mounted on the BOJ to cut the YCC.

In December, the BOJ shocked global markets by allowing the yield on 10-year government bonds to rise by 50 basis points on either side of its 0% target, in a move that fueled speculation the central bank may follow. the same direction as other major economies by allowing rates to rise further.

The unexpectedly aggressive move sent stocks tumbling, while the yen and bond yields soared.

But Kuroda later ruled out a short-term exit from his ultra-loose monetary policy.

When local media first reported on Friday that Ueda would be named the next BOJ governor, the yen bounced against the US dollar and euro.

“Investors took the news as a sign of a radical turnaround,” said Stefan Angrick, senior economist at Moody’s Analytics.

“But it will take time for the implications to become clear,” he said. “With demand-driven pricing pressure still preciously thin and stronger wage gains yet to materialize, it’s hard to see the BOJ rush to toughen up under a new governor.”

On Friday, Ueda told reporters that he thinks “the current BOJ policy is appropriate” and “monetary easing should continue given the current state.”

In an opinion piece published last July in the Nikkei, Ueda warned against prematurely raising interest rates.

However, in the same piece, he also noted that the BOJ must prepare an exit strategy, saying a “serious” look is needed at some point on the unprecedented monetary easing framework, which has continued far longer than most would expect. .

“We don’t think he should immediately change the BOJ’s policy stance based on his previous comments,” said Min Joo Kang, senior economist at ING Group, in a recent research report.

“He (Ueda) is likely to change monetary policy only gradually and the reliance on BOJ data – inflation and wage growth – will become more important.”

Japan’s economy remains weak, highlighting the difficult task ahead for Ueda.

According to the latest data from Tuesday, Japan’s economy grew by an annualized 0.6% in the fourth quarter of 2022, reversing a 0.8% contraction in the third quarter. But it was much weaker than the consensus forecast of a 2% expansion.

“We believe the modest recovery will continue this year, but today’s data support the Bank of Japan’s argument that the recovery is still fragile and that loose monetary policy is needed,” analysts at ING said. “The new governor will have a hard time initiating any normalization.”

– CNN’s Junko Ogura contributed reporting

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