Bank of Japan Governor nominee Kazuo Ueda warned against any magical solution to produce stable inflation and normalize policy as he largely stuck to the existing central bank script in the first parliamentary hearing to approve his appointment.
(Bloomberg) — Bank of Japan Governor nominee Kazuo Ueda warned against any magical solution to produce stable inflation and normalize policy as he largely stuck to the existing central bank script in the first parliamentary hearing to approve his appointment.
During a session that lasted almost three hours, Ueda said the BOJ should continue with stimulus for now, while flagging the need to consider returning to a normal policy approach if the outlook for prices clearly improved.
He said it would still take some time to reach stable and sustainable inflation in Japan backed by wage growth, adding that a joint accord with the government committing the BOJ to its 2% goal didn’t need changing.
“If I’m appointed BOJ governor, my mission isn’t to come up with some kind of magical, special monetary policy,” Ueda said. “As I’ve mentioned before, if you look at the trend in prices, there are improvements we’re seeing, but the situation remains that it’ll still take some time until we’ve securely achieved 2% inflation.”
His comments during the hearing were largely in line with those from senior BOJ officials in recent months including departing Governor Haruhiko Kuroda and suggested a large pivot in April was not in the pipeline. That view was reiterated by Prime Minister Fumio Kishida later in the day.
Ueda remained tight-lipped on the BOJ’s framework for controlling yields, offering little for market players to jump on amid speculation of policy change at the central bank in the coming months.
The yen was little changed after he finished speaking, while bond futures edged up and bank stocks retreated. The moves indicated traders were having difficulty drawing any significant conclusions from the comments.
Traders See Little in Ueda’s Comments to Really Change BOJ Bets
“Naturally, Ueda didn’t want to tie his hands to any policy before assuming his role,” said Chotaro Morita, chief rates strategist at SMBC Nikko Securities Inc., indicating that Ueda was likely looking for time to assess inflation, policy and its side effects. “That indicates for now that he won’t try to change policy from the get-go even though some market participants are expecting that.”
Global investors and BOJ watchers were closely scrutinizing Ueda’s hearing for any hints over how he would run policy as central bank chief amid intense speculation of policy adjustment under new leadership following a decade of massive stimulus.
Bond yields across the globe have risen as central banks pushed up interest rates to tackle inflation in contrast to the BOJ’s easy-money stance. That’s left Japan’s central bank straining to defend its 0.5% cap on 10-year government debt, one of its key measures for stimulating the economy and prices.
The BOJ forked out a record 23.7 trillion yen ($176 billion) in January alone to keep bond yields in line, more than three times the size of the country’s expanded national defense budget for the coming fiscal year.
“His neutral comments, coming against the market’s hawkish expectations and together with rising global yields, suggest the yen could embark on a weakening trend again once we are past this volatility,” said Charu Chanana, a senior markets strategist at Saxo Capital Markets.
Despite expectations Kishida would opt for a BOJ insider to replace Kuroda, he surprised market players with his choice. Ueda, who served as a BOJ board member two decades ago, will be the first academic to become chief assuming he is approved.
Kishida’s majorities in both houses of parliament mean the nomination is almost certain to get a green light. Ueda will appear in an upper house hearing on Monday, while the two candidates for deputy governor positions will answer questions again on Tuesday.
In a Bloomberg survey conducted after Ueda was nominated last week, 70% of economists forecast a tightening step by the central bank by July. Some economists have flagged the risk that the BOJ may even tweak its yield curve control program in March before Kuroda leaves office to give Ueda more time to consider his first move.
What Bloomberg Economics Says…
“Under Ueda’s leadership, we think the BOJ will keep its current yield curve control framework – capping longer-term yields at 0.5% — until the recovery solidifies around 1Q24.”
— Yuki Masujima, economist
For the full report, click here
Ueda has previously indicated that the framework isn’t suited to small tweaks, a view that has fueled speculation that if he does look for change, he will ditch yield curve control rather than adjust it.
“If another clear step up in improvement in the outlook for the price trend comes into sight, we’ll inevitably have to think about a review of yield curve control or a move in the direction of policy normalization,” Ueda told lawmakers.
Still, he said he would refrain from getting into the specifics of curve control during the hearing. Shortening the maturity of targeted yields was one among many options and the BOJ has been working to address the side effects of the policy framework, he added.
If the BOJ judges powerful monetary easing must go on, it would need to think about the sustainability of yield-curve control, Ueda added.
His indication that no change was needed to the 2013 accord with the government also points to a strong thread of continuity for now. The landmark accord commits the BOJ to achieving stable 2% inflation as soon as possible and is seen as a cornerstone of the Abenomics growth strategy of former Prime Minister Shinzo Abe.
Speaking later in the day, Kishida said the government wasn’t uncomfortable with Ueda’s comments on the accord. He added that he wanted to meet Ueda as soon as possible after the nominee secures approval from parliament.
“He reiterated policy direction based on the joint statement,” Kishida said. “He wasn’t indicating any major change.”
Kuroda, who was appointed by Abe to head the central bank, is due to step down on April 8 after a decade at the helm dedicated to spurring inflation in an economy that has struggled for years with weak or falling prices.
Data for January released earlier Friday showed that core inflation has reached 4.2%, more than double the BOJ’s price target. Under Kuroda, the BOJ has insisted that prices will cool below the target, partly due to government subsidies, and that more evidence of stronger wage growth is needed to secure stable inflation.
Ueda echoed that view in his comments. He said the BOJ had no direct tool to impact the pay trend, adding he was unsure about introducing a wages target.
Referring to the impact of inflation, he gave his own example of how the daily bento lunchbox he buys from a convenience store has risen above 500 yen ($3.70). That’s a figure that might still seem a bargain for overseas investors.
It also points to a humble background for a university professor now lined up to take on one of the trickiest jobs in central banking.
BOJ Pick Ueda Feels Pain of Inflation From Bento Lunch Boxes
“Throughout the hearing, his explanation was easier to follow compared with Kuroda as he backed up his arguments with data or logic,” Morita said, flagging his more neutral-sounding approach. “Still, it’s too early to jump to any conclusions about what he will do as governor.”
–With assistance from Cormac Mullen, Winnie Hsu, Yuko Takeo, Isabel Reynolds and Yuki Hagiwara.
(Adds comment from Prime Minister Kishida)
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