BOJ’s timing for next hike in focus as Ueda starts second year

GOVERNOR Kazuo Ueda marks his first anniversary at the helm of the Bank of Japan (BOJ) having dismantled one of the most ambitious stimulus experiments in central bank history with an approach that surprised analysts both for its speed and its success avoiding market ructions.

When Ueda began his five-year term on Apr 9 last year, analysts warned of severe risks to financial markets if the new governor failed to tiptoe a fine line. At the time, the BOJ was a global outlier on policy, with its negative rate, massive asset purchases and yield curve control (YCC) programme. Ueda’s predecessor Haruhiko Kuroda had shown that the bank could jolt global markets with a mere tweak to the YCC mechanism.

In a steady and understated manner belying the magnitude of the task at hand, Ueda began making changes early in his tenure, starting with small alterations to YCC in July and October. Then he ended the most aggressive monetary easing programme in modern history in one final act last month, restoring interest rates as the BOJ’s main policy tool with its first hike in 17 years.

“I will give him a passing score of 70” on a scale of 0-100, said Shinichiro Kobayashi, chief economist at Mitsubishi UFJ Research & Consulting. “He deserves praise, as he did not trigger any big shock to markets.”

Nobuyasu Atago, chief economist at Rakuten Securities, goes much further, lauding Ueda’s ability to keep markets well informed to avoid shocks. “I would give him a score of 100. His communication was very good, and it was so easy to understand. The key is to take what he said without second guessing.”

Ueda’s BOJ has shown it will seize opportunities to act when they arise. While Ueda started out seemingly having inherited Kuroda’s dovish attitude, he wound up changing forward guidance or monetary policy at half of the eight policy meetings he oversaw.

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“When I took this role, I felt the BOJ’s policy framework had become extremely difficult technically for various reasons,” Ueda said in parliament on Monday (Apr 8). “I hoped to simplify it as much as possible if economic conditions allowed. Fortunately, the economic performance last year was good, so my hopes were fulfilled to some extent.”

Ueda’s first steps laid the foundation for what came later. In tweaking YCC in July and October, he transformed the programme into a flexible form of insurance against sharp increases in yields. Those steps made it almost certain the BOJ could exit the policy without triggering the sort of market mayhem that ensued when the Reserve Bank of Australia discontinued its target for three-year bond yields in 2021.

Just days before the March policy meeting, the board was said to be divided on whether to end the negative rate immediately or wait. Then the nation’s largest umbrella for unions announced results of annual wage negotiations that far exceeded expectations, and Ueda did not hesitate.

Overwhelmed by his hectic schedule, Ueda has said he wished the days were longer. He longs for more time to think things over, and he’s content to do so for hour upon hour. A trans-Pacific flight is a chance for a good think rather than a good movie.

“My favourite way of spending time is thinking,” Ueda said in an interview published Mar 25 in the BOJ’s public relations magazine. “I’ve been so busy after taking the governor position. I always wish a day had 36 hours.”

After the momentous achievements of the last 12 months, the first anniversary of Ueda’s term in office begs the question: What is next?

Over the next four years, Ueda has plenty to do. The BOJ has the biggest balance sheet as a ratio to the size of the economy among central banks. The bank is the biggest single holder of Japanese stocks, and it owns half of the government debt market. Ueda will need to find a strategy to shrink the balance sheet without destabilising financial markets.

The weak yen is quickly emerging as another challenge. The currency hit the lowest level versus the US dollar in about 34 years late last month. Half of BOJ watchers see a chance of the bank being forced to raise rates to put a floor under Japan’s currency by helping to narrow US-Japan interest rate differentials.

In Ueda’s first year, the Nikkei stock index rose about 43 per cent and the yen weakened by about 12 per cent.

“The yen is a wild card,” Kobayashi said. “That could push the BOJ to consider a rate hike even as it would prefer to take time to decide the timing given the anaemic economic recovery.”

Many economists estimate that the economy contracted last quarter, as consumer spending continued to swoon due to sticky inflation. Data on Monday showed that Japan’s real wages fell for a 23rd month in February.

Tsutomu Watanabe, an economics professor who was on the shortlist of candidates to become BOJ governor last year, said the bank has regained its ability to respond to the economy. That is in sharp contrast to Kuroda’s aggressive efforts to change economic dynamics through taking drastic BOJ steps.

“Kuroda devoted his life entirely to creating discontinuity in order to move the economy,” Watanabe said. “Ueda’s BOJ is basically saying it will not do that. Instead it will react to the economy. It’s very different from the Kuroda era.”

Ueda, 72, has said he is trying to maintain his health by eating “a mountain of vegetables”. To refresh himself, he does radio calisthenics in the morning and afternoon. He also stretches for 15 minutes after taking bath at night. His health and endurance are going to be critical as he navigates the rest of his governorship.

In ending the negative rate, the BOJ raised rates to between 0 per cent and 0.1 per cent. Lifting the policy rate further could face opposition, as doing so might harm the economy, according to Hideo Kumano, executive economist at Dai-Ichi Life Research Institute.

“His job is only a half done,” said Kumano, also a former BOJ official. “There could be strong criticism of the normalisation process once the economy gets worse. Then he will face a real test.” BLOOMBERG