Tokyo The search for a new governor of Japan’s central bank ends in surprise. According to consistent media reports on Friday, Prime Minister Fumio Kishida wants to nominate the 78-year-old economist Kazuo Ueda to succeed the previous head of the Bank of Japan, Haruhiko Kuroda, who is stepping down in April after ten years in office.
“It’s a clear surprise,” says Martin Schulz, chief economist at technology group Fujitsu and a member of the Japanese government’s Advisory Council on Economic and Budgetary Policy. Some investors are now hoping for a move away from the ultra-loose monetary policy. Ueda is “undoubtedly one of the well-known monetary policy experts,” says Schulz.
In addition, Shinichi Uchida, executive director of the Bank of Japan (BoJ), and Ryozo Himino, former head of the Financial Services Authority, are also set to become deputy governors. The top trio for central bank management is to be officially presented to Parliament on Tuesday. Hearings and elections by parliamentarians are planned later.
Kuroda’s previous deputy Masayoshi Amamiya had been traded as the clear favorite for the chief post in the past few days. Central bank observers said his election would be a signal against a radical correction of the ultra-loose monetary policy.
Japan’s business newspaper “Nikkei” reported that Amamiya is said to have rejected the government’s solicitation. “There was probably not enough agreement on how monetary policy should continue,” suspects economist Schulz.
The big challenge for Japan’s new central bank governor
The challenge for the new boss is enormous. Naoki Kamiyama, chief strategist at Japanese asset manager Nikko Asset Management, said: “The Bank of Japan announced its intention to stick to its ultra-loose policy in January,” he reports. “Nevertheless, the Bank of Japan is expected to end its dovish policy and hike interest rates in the near future.”
That would be an extreme break. Kuroda stands for a very expansive monetary policy that is now reaching its limits. After taking office in 2013, he dramatically increased purchases of Japanese Government Bonds (JGBs), in line with then-Prime Minister Shinzo Abe’s economic policies. He wanted to force an inflation rate of two percent in the country plagued by deflation.
In 2016, the central bank introduced yield curve control. The interest rate for ten-year bonds is currently allowed to fluctuate by 50 basis points up or down around zero. The interest rate for short-term bonds is minus 0.1 percent.
But the central bank now owns more than 50 percent of the national debt and thus stabilizes the national debt, which amounts to more than 250 percent of gross domestic product. Then, as central banks around the world raised interest rates to fight inflation, global hedge funds also began to bet against the Bank of Japan for a turnaround.
So the pressure on the new head of the central bank was great right from the start. Izumi Devalier, economist at Bank of America in Tokyo, assumes “that the new central bank leadership will be cautious with major measures and will delay a change in the framework conditions until mid-2024”.
Schulz also expects reforms, but not a radical break. On the one hand, the central bank must slowly reform its ultra-loose monetary policy. At the same time, she must ensure that interest rates do not rise too much, so as not to jeopardize the financing of the heavily indebted state budget or the continued weak domestic demand.
Because everyone, politicians, entrepreneurs and consumers, are used to a zero interest rate policy. At the same time, social spending increases with the proportion of pensioners. In addition, Kishida wants to double the armaments budget, drastically increase child support and invest in renewable energies. “So every candidate has to implement a complex policy,” says Schulz.
This is what the first academic as Japan’s central bank chief stands for
Kishida’s current personnel decision leaves the markets guessing about the future course for the time being. Ueda will be the first post-war central bank governor with an economics background. Even more surprising is that Kishida is breaking with tradition of alternately appointing a Treasury man and a central banker to head the Bank of Japan.
Instead, Ueda has embarked on an academic career. He received his doctorate in economics from the renowned Massachusetts Institute of Technology in the USA and was a professor at the University of Tokyo, one of the most important training centers in Japan. In 1998, the monetary policy mastermind was even appointed to the central bank’s nine-member Monetary Policy Committee, which decides on the country’s monetary policy.
Back then, when Japan slipped into deflation, he supported the introduction and maintenance of the zero interest rate policy. In 2000, for example, he voted against a slight increase in the key interest rate, which the central bank soon had to reverse. But in recent years he has hardly appeared in public.
Expert Schulz has evaluated his analysis. “With Ueda as governor, the central bank is likely to return to a more academic, balanced approach to monetary policy,” he says. In the past, Ueda has advocated expansionary policies as long as deflation persists. “However, he is skeptical about the results of unconventional measures and supports the coordination of government fiscal policies.”
Since the expansive monetary policy is no longer effectively boosting the economy and corporate investment, Schulz believes he can support a fiscal policy that promotes investment in the economy’s growth potential. “Such a political stance, currently referred to in the US as modern supply-side economics, may have prompted the government to choose him as the next governor.”
Another reason might have been partisan politics. At first glance, Ueda does not belong to any of the monetary policy wings. Prime Minister Kishida, on the other hand, is one of the conservatives who are more likely to focus on stabilizing the high level of debt. The outgoing central bank head Kuroda, on the other hand, belongs to the group of those who prefer an expansive policy. Perhaps that is why Ueda was a suitable compromise candidate.
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