The next Bank of Japan governor faces the daunting task of unwinding a massive balance sheet while tackling the financial market distortions and lax fiscal discipline resulting from years of ultra-loose monetary policy. Unraveling all that without triggering a global financial crisis is a challenge not to be underestimated. But new BOJ chief Kazuo Ueda, who has been largely silent since he was announced as Haruhiko Kuroda’s successor on Friday, is widely seen as a pragmatist who can adapt to changing economic conditions.
The central bank’s top brass has clearly maintained its ultra-loose monetary policy until inflation sustainably hits the 2% target. Ueda seemed to confirm that Friday when he said there was “very high uncertainty” over whether companies would continue raising prices and wages. He stressed the need to monitor the risk of accelerating price gains from rising energy and food costs. Also, he warned that there was a chance a weaker yen could end up dampening corporate profitability and the strength of consumer spending.
Ueda brushed off speculation that his remarks were an indication of a shift toward easing the policy soon, saying it would be “premature” to pre-determine when the BOJ might end its yield curve control (YCC) program of holding short-term interest rates near zero and buying vast amounts of government bonds and risky assets. He also suggested that the BOJ consider upgrading its economic assessment for the first time in a year, potentially characterizing the economy as recovering. Still, he offered no details about when such a move might be made.
Amid the growing concerns over the domestic economy, Ueda offered a cautious take on the overseas economic outlook. He cautioned that aggressive U.S. interest rate hikes could hurt global growth and warned that the Chinese economy faced a “challenging situation” as its trade surplus shrinks. “The global economy is facing several uncertainties, and it is important for the BOJ to monitor the situation closely and keep the momentum in the economic recovery,” he added.
The upcoming review of the BOJ’s past monetary policy moves will lay the groundwork for the eventual exit from its massive stimulus program. Ueda made it clear that he saw no need to water down its 2% inflation target, brushing aside calls by some academics for such a move to speed up an end to the current easing cycle. He also signaled he would continue with the BOJ’s survey and hearings of regional businesses. He said he planned to hold workshops inviting academics as part of the policy review process. This is likely to give credence to the view that he is not a man of dogma and will use the opportunity of his new role to push for more transparency and better communications with markets. As a former BOJ’s policy board member, he is known to have strong ties with the financial community.
