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Is the New Bank of Japan Governor Up to the Task?

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Is the New Bank of Japan Governor Up to the Task?

Incoming BOJ head Ueda Kazuo faces some difficult challenges.

Is the New Bank of Japan Governor Up to the Task?
Credit: Shuji Kajiyama / ASSOCIATED PRESS

Japan is getting a new Bank of Japan (BOJ) governor. The government has presented economist Ueda Kazuo to the Diet as its candidate. Ueda will need to be approved by both the House of Representatives and the House of Councillors, but since the ruling party has a majority in both chambers, this is unlikely to present a problem. Incumbent BOJ Governor Kuroda Haruhiko’s current term ends in April.

There has long been considerable speculation as to who would replace Kuroda, best known for coming up with the so-called “unprecedented monetary easing” as a means to overcome Japan’s persistent deflation. Many observers have felt that the choice of his successor would determine the fate of Kuroda’s signature policy.

Ueda is a widely respected economist specializing in finance. After graduating from the University of Tokyo, he earned a Ph.D. from the Massachusetts Institute of Technology. From 1998 to 2005, he was a member of the Policy Board at the BoJ Monetary Policy Meeting, so he has considerable practical experience. Traditionally, however, the BoJ governor has been appointed from within the Ministry of Finance or from within the BOJ itself This is the first time a scholar has been appointed since the end of World War II.

If confirmed, Ueda faces numerous challenges. After all, Kuroda’s unprecedented monetary easing policies have not only been ineffective, they have in fact been conspicuously harmful.

For years the BOJ failed to achieve its price stability target of 2 percent, which it announced with the government in a joint statement in 2013. The 2 percent target was finally exceeded in April 2022, but this was only due to rising prices of imported energy, and was not a result of monetary policy. The expansion of base money through the massive purchase of government bonds that began in April 2013 did not have the expected effect, while the BoJ’s purchase of government bonds has created a major problem of loosening monetary discipline.

Introduced in January 2016, the negative interest rate takes a fee from some deposits with the Bank of Japan held by financial institutions, with an associated hit on the profitability of financial institutions, for which the bank has also come under fire. Meanwhile, yield curve control, introduced in September 2016, means that the BoJ controls not only short-term interest rates but also long-term rates to some extent. However, the limitations of this approach have become evident, in that it hinders the functions of the financial markets and is susceptible to speculators.

Eventually, the BoJ will also need to address the exchange-traded funds (ETFs) it has been buying in large quantities, but if it tries to reduce its holdings by selling them, stock prices may plummet. Moreover, a withdrawal from the unprecedented monetary easing policy will naturally lead to a rise in long-term interest rates, and would also increase the fiscal burden by raising interest payments on government bonds.

Given these challenges, Ueda’s appointment as governor should be applauded. It is, after all, groundbreaking for the government to part with the conventional practice of appointing the head of the BOJ from the MOF or the bank itself. Internationally, it is not uncommon for a scholar to head the central bank, with former Federal Reserve Board Chair Ben Bernanke, his successor Janet Yellen, former European Central Bank President Mario Draghi, and others all being economists. Now Japan has its own chance to base its monetary policy on a robust sense of economic logic.

Second, Ueda has a balanced stance on monetary policy. Since Abenomics, the BoJ’s governor, deputy governors, and members of the Policy Board have all been so-called “reflationists” with aggressive stances on monetary easing and fiscal spending. In this regard, Ueda seems to be skeptical of the effects of quantitative easing, although he has exhibited an understanding for monetary easing. Monetary policy will now have to deal with the difficult task of sequentially withdrawing from unprecedented easing, as mentioned above. Ueda’s excellent sense of balance makes him a good fit for the job.

Ueda also has a strong sense of balance as an economist. He is widely known for having served as the arbiter of the Iwata-Okina dispute in the early 1990s. Iwata Kikuo argued that the BoJ should control the quantity of money through base money rather than interest rates, while Okina Kunio objected that base money is determined passively, so that the quantity of money can only be controlled indirectly through interest rates. By contrast, Ueda held that Okina is correct in the short term, but that, as Iwata says, BoJ should pay more attention to changes in the quantity of money over the medium and long terms. This is known as the Ueda ruling and is emblematic of his sure-footedness when it comes to balance.

Third, it has become easier to escape the spell of Abenomics. Monetary policy under Kuroda has played a central role in Abenomics, the policy for Japan’s economy developed by the late Abe Shinzo. This trend continues under the Abe faction of the Liberal Democratic Party (LDP). The fact that Abe’s successor as prime minister, Kishida Fumio chose Ueda, who is clearly not a reflationist, shows that he wants to distance himself from Abenomics.

The challenges facing monetary policy going forward will be difficult, but Ueda’s rich scholarship, experience, and sense of balance make it possible for Japan to achieve a soft landing from the era of unprecedented monetary easing.