What to expect from the first academic economist to be BOJ governor

After a flurry of speculation, the nomination of Kazuo Ueda as new head of the Bank of Japan has come as a double surprise.

For one thing, Ueda wasn't really considered a possible candidate by the media and market observers. On top of that, he lacks the typical background of a BOJ governor.

Ueda, a professor at Kyoritsu Women’s Educational Institution, wasn't really on their radar because the BOJ governor job has traditionally been assumed by a long-serving Finance Ministry bureaucrat or central bank official — he will become the first academic economist to lead the BOJ in the post-World War II era if his appointment is approved by parliament.

Ueda, who was formally nominated Tuesday, also taught at the University of Tokyo, from which he graduated.

Other than Makoto Usami, who worked at a private bank and became BOJ chief in 1964, all governors including the incumbent, Haruhiko Kuroda, began their careers at the Finance Ministry or BOJ and worked there for decades.

Given that the next governor will be under pressure to disentangle and review the complex ultraloose monetary policy promoted under Kuroda, someone with a neutral stance like Ueda is more appropriate for the job, some economists said.

“Ueda is an orthodox academic economist and has also served as a member of the BOJ’s policy board. He is a person who has both theories and practical experience,” said Masaaki Kanno, chief economist at Sony Financial Group.

“He is also not biased toward a particular monetary policy stance. In that sense, I think he is a choice suited to the current situation.”

Tsuyoshi Ueno, senior economist at NLI Research Institute, also said Ueda’s strong theoretical knowledge could help to unravel and reorganize the "various confusing parts" of the BOJ's monetary policy, adding that Ueda is a well-known economist who has connections to the international financial community.

Ueda's stint on the BOJ policy board, which can include members from the private sector and academia, ran from 1998 to 2005, but he has spent most of his career in academia — a stark contrast to previous governors.

When Ueda was a BOJ board member, the bank introduced its zero-interest rate policy and quantitative easing ahead of other central banks, and he supported the theory behind the policies.

In other countries, it is not rare for economists, such as former U.S. Federal Reserve chair Janet Yellen and former European Central Bank President Mario Draghi, to lead the central bank.

But given past practice in Japan, for some time it was current BOJ Deputy Gov. Masayoshi Amamiya and former Deputy Gov. Hiroshi Nakaso who were widely seen as most likely to succeed Kuroda.

Amamiya, who has been working at the BOJ since 1979, is one of the key officials in charge of crafting current monetary policy. Nakaso, currently the chairman of the Daiwa Institute of Research, also worked as a BOJ official for about 40 years until his term as a deputy governor ended in 2018.

If either became governor and were involved with the policy review, “there might have been a limit to how far they could say that the policy they decided on was wrong or how critical they could be,” Kanno said.

Ueno echoed the point, but said it is also important to have someone familiar with the BOJ’s internal decision-making process and background.

This is where Shinichi Uchida, the central bank’s current executive director and nominee for one of the new deputy governor positions, will likely come in, as he is one of the key officials in charge of creating Kuroda’s monetary policy framework.

“Ueda is not involved with Kuroda’s monetary policy at all, so there are details that he doesn’t know, but Uchida will be able to support him there,” Ueno said.

Along with Uchida, the government has put forward Ryozo Himino, former chief of the Financial Services Agency, as a deputy governor candidate. Economists said Himino has connections with the global financial community and is well-versed in international financial regulations and systems, noting that he is also an articulate communicator.

Economists have said that the three represent a well-balanced team, because each has his own strengths that complement those of the others.

In the meantime, a thorny path lies ahead for whoever takes the helm, since the new governor will likely have to at some point move away from actively seeking higher inflation and containing the rise of interest rates, with this needing to be done as smoothly as possible.

This will require strong communication with the public and markets, something Kuroda has not been doing particularly well recently.

In December, the BOJ made an unexpected move to tweak its so-called yield curve control, a policy of purchasing unlimited amounts of 10-year Japanese government bonds to control JGB yields at around 0%. It announced that it would allow long-term yields to fluctuate plus and minus 50 basis points, a change from the previous 25-basis-point range.

Kuroda said it was intended to improve market functions by more smoothly spreading out the effectiveness of monetary easing, but this contradicted a previous remark that such a tweak to the yield curve control policy would disturb the easing policy.

“One of the strengths of an academic background is that Ueda values logic and does not buy into dubious logic,” so he will likely be able to correctly communicate the BOJ's intentions to the market, Hideo Kumano, chief economist at Dai-Ichi Life Research Institute, wrote in a report released on Monday.

Ueda himself has stressed that point.

"I’ve been an academic for a long time, so I believe it’s important to logically make decisions and to give clear explanations," Ueda told reporters last Friday after it was reported that he would be nominated.

But some other economists said it is still unclear whether Ueda will be able to properly communicate with markets, as it is a tough task. That's because if the BOJ announces that it will conduct a comprehensive policy review, market participants will predict an adjustment or the scrapping of the yield curve control policy, which is a major component of Kuroda's easing policy but has side effects that are widely seen as problematic.

This is expected to prompt them to sell JGBs, possibly leading to a spike in interest rates, and the BOJ would have to undertake purchases to contain it, thereby swelling the central bank’s balance sheet and incurring huge unrealized losses.

Moreover, “the BOJ governor will face some tough questions in parliamentary sessions and news conferences” and it is critical to answer without misleading markets, Kanno said.

“Thus, the exit from (the current monetary policy) is difficult.”