AThe inflation rate in Japan rose to 4.3 percent in January. The last time the rate of inflation was higher was more than 41 years ago in the fall of 1981. What makes Japanese consumers complain after many years of almost stable prices does not upset Kazuo Ueda, the candidate for the governorship of the Bank of Japan.
Ueda assumes that inflation probably peaked in January. In the next winter half-year, the inflation rate will probably fall below 2 percent, he said on Friday in a hearing of a committee of the Japanese lower house. Ueda thus expects the central bank to miss its inflation target of 2 percent.
Then came the redeeming sentence for traders in the financial markets: “I believe it is appropriate to maintain monetary easing and to be creative in accordance with the current situation.” The outgoing governor of the central bank, Haruhiko Kuroda, would have had it different not said, who initiated the drastic monetary easing in Japan ten years ago. Since then, the central bank has been buying bonds with the aim of keeping the inflation rate above 2 percent.
Long-awaited hearing
Ueda’s hearing had been eagerly awaited in Japan and on the international financial markets because they had promised information about the monetary policy line of the new. Completely surprisingly, two weeks ago the government presented the economists, who are recognized in specialist circles but little known internationally, as candidates. Since then, there has been much speculation as to whether and when the 71-year-old Ueda will resolve the confused constructs of Kuroda’s expansive monetary policy. An old book by the economist from 2005 about his first experiences as a central banker was sold out in Japan within hours because there was no knowledge of Ueda’s thinking.
An entirely economist and a very future central banker, Ueda avoided committing to an exit from the expansive monetary policy or even a date for it in the hearing. “If the Bank of Japan’s 2 percent inflation target is in sight on a sustained basis, the central bank must consider normalizing policy,” he said, while dampening speculation of a quick departure: there is still some way to go.
Ueda also rejected a change in the inflation target of 2 percent agreed between the government and the Bank of Japan, which has recently been whispered about. 2 percent is the international standard, he said, apologizing because it sounded a bit harsh.
Is it all just show?
Is it all just for show so as not to arouse resentment at his appointment in the largest governing party, the Liberal Democrats? Prime Minister Fumio Kishida is said to have a monetary tightening bias, which has met with fierce opposition from assassinated former Prime Minister Shinzo Abe’s faction within the party. Irrespective of this political friction, the financial markets are still expecting that the days of expansive monetary policy in Japan and, above all, of yield curve control are numbered.
With this monetary policy tool, the Bank of Japan tries not only to keep the short-term interest rate at -0.1 percent, but also the ten-year interest rate between 0.5 and -0.5 percent. In January alone, the central bank bought almost 23 trillion yen worth of government bonds to stem international interest rate hikes.
When asked by MPs, Ueda declined to comment on details of how the bank could initiate and end its exit from expansionary monetary policy. “There are different ways that yield curve control could look in the future,” he said. It is desirable to take the time to make a decision about this.
Monetary policy under Ueda is of paramount importance not only for Japan but also for the international financial markets. Exceptional by historical standards, Japanese investors sold 21.7 trillion yen net worth of foreign debt last year, equivalent to 157 billion euros. Rapidly rising interest rates abroad, which are depressing bond prices, and the rapid devaluation of the yen played a role in this. Another reason for this was the expectation that interest rates in Japan would rise and that bonds in Japan could therefore yield higher.
Life insurers are at odds
Investors are betting that the Bank of Japan will have to abandon yield curve control in an environment of rising global interest rates. If Ueda reinforces this expectation, it may accelerate the return of capital to Japan and affect liquidity in global bond markets.
Before the parliamentary committee, the designated central bank governor admitted that the loose monetary policy had side effects. The Japanese government bond market has dried up as the Bank of Japan swallows the paper like a great whale. Market pricing no longer works properly. Banks and life insurers are struggling with the low long-term interest rates and the flat interest rate structure. And despite billions in government bond purchases, the Bank of Japan is struggling to contain upward pressure on longer-term interest rates.
However, Ueda did not voice any criticism of the expansive monetary policy with negative interest rates and the yield curve control. “There were various side effects, but given the economic and price situation, the methods were as necessary as appropriate to achieve the 2 percent inflation rate sustainably,” says Ueda. The outgoing central bank governor Kuroda could not have said that better either.