Ueda takes over top BOJ job with a long to-do list

The Bank of Japan is seeing its first leadership change in a decade, with new Gov. Kazuo Ueda officially taking the helm this weekend.

But there will be little time to celebrate for Ueda, an academic, author and former BOJ board member who will be under the microscope as he leads the central bank through a crucial period.

Indeed, Ueda will have to navigate the unfinished work of his predecessor, Haruhiko Kuroda, whose second five-year term ended Saturday, to mitigate the side effects of a decadelong monetary stimulus program, while contending with the chaos stemming from U.S. and European banking woes that have ruffled Asian markets.

Ueda will be working alongside two new deputy governors: Ryozo Himino, a former Financial Services Agency commissioner, and former BOJ executive director Shinichi Uchida, both of whom are respected in their field. Even a slight shift by the new team is sure to draw global attention.

Here are some of the items on Ueda's to-do list as he takes the helm.

Policy tweaks

Under Kuroda, the BOJ employed a yield-curve control policy (YCC) — a strategy of buying up Japanese government bonds (JGBs) in order to control long-term interest rates at around 0%, in tandem with a negative interest rate policy.

Out of sync with other central banks that have been implementing rate hikes over the past year to battle back inflation, this approach and its side effects have been under increasing scrutiny amid concern of the impact on the financial market functions and stability in Japan.

While Ueda has expressed some concerns about the YCC policy, any sudden moves, experts say, would risk sending shock waves to global markets.

Takahide Kiuchi, executive economist at Nomura Research Institute and a former BOJ policy board member, said Ueda’s first priority will be to undertake a review of the framework of easy monetary policy, in which there are inconsistencies to be addressed.

Ueda will likely revise the YCC policy in the near future, because it risks “undermining market function and leading to reduction of liquidity, which may lead to an increase in volatility,” Kiuchi said.

While market participants expect Ueda to set course for the scaling back of Kuroda’s dovish policy, some economists have said that the new governor will likely act cautiously.

The BOJ is unlikely to pursue sudden changes at the first policy meeting under Ueda, scheduled for the end of this month, to avoid fueling instability in the financial markets, experts believe.

Masamichi Adachi, Japan Chief Economist at UBS, said consistency is required in order for the BOJ to achieve its inflation target and maintain stability.

The central bank should avoid delivering a big policy change immediately under the new leadership, Adachi said, as this could then trigger turmoil across the financial system and markets more generally.

“If the (economic) conditions deteriorate and the yen starts to depreciate further, the BOJ may postpone the process of normalization policy. YCC may be the only policy change this year under Mr. Ueda,” Kiuchi said.

Yen value

While 2022 saw the yen plunge to historic lows against the U.S. dollar, at one point breaching the ¥150 mark to hit a 32-year low, some analysts expect that the yen could strengthen, as possible BOJ policy tweaks under Ueda could nudge up its value.

Policies by central banks in other countries will also impact the yen.

In the U.S., markets anticipate that the U.S. Federal Reserve will soon end its rate hike cycle, with analysts predicting rate cuts possibly later this year to jump-start the country’s economy.

For Japan, this could also have knock-on effects, said Takeshi Kitaura, a senior analyst at Bloomberg Intelligence.

“Rate hikes have (caused) the yen to depreciate so a reversal would lead to a relatively stronger yen,” Kitaura said.

While Kitaura doesn’t expect large changes to BOJ policy in the near term, “a tightening (could) lead to an appreciation of the yen,” he said.

While a weak yen helps push up the profit of Japanese exporters, it increases import prices for food and energy and can trigger higher inflation.

Inflation

Last year, the prices of essential goods soared in Japan, with food up 4.5% from the previous year, while fuel, electricity and water bills rose 14.8%, according to government data released in January.

The war in Ukraine — combined with the BOJ’s ultraeasy monetary policy — was blamed for raising import costs. Knock-on effects were felt by consumers and businesses: some Japanese restaurants reported higher import costs, while businesses with low margin products were hit particularly hard by the increase. Major convenience store operator Lawson’s 10% price increase for its signature chicken nuggets even made international headlines.

During the World Economic Forum in Davos, Switzerland, in January, Kuroda defended the approach, saying that the bank would maintain its “accommodative” policy, while expressing optimism that wages would rise to hit the 2% inflation target in a way that was sustainable. Kuroda blamed Japan’s record-high inflation rates on rising import prices.

Ueda has said inflation will slow down and he is not planning to alter the 2% inflation target backed by healthy wage growth.

With inflation in mind, the government has adopted a series of countermeasures, including cutting electricity bills from January, in a bid to reduce the impact on households.

In February consumer prices excluding fresh food were up 3.1% from the previous year — but had slowed from four-decade high following the subsidies.

Many large companies have also agreed to historic wage increases during the spring shuntō wage talks between labor and management as firms aim to counter inflation and labor shortages.

Inflation rates will be closely watched, but price hikes are not expected as an ongoing issue immediately under the new BOJ team with Kitaura saying “inflation has peaked for the near term.”

Banking crisis

While Japan’s major banks suffered underwhelming market performances in the aftermath of recent U.S. and European banking turmoil, regulatory or government-level shifts have not been sought in Japan as experts say the factors which led to the collapse of two U.S. midsize banks were the result of specific market conditions that Japan does not face.

Still, global fears of a recession and shaken confidence in the banking sector have led to uncertainty as regulators and officials work hard to restore trust.

In March, the U.S. Federal Reserve unveiled plans to join with several banks including the BOJ to form a joint liquidity operation that would allow for increased frequency of U.S. dollar swaps. The move was welcomed by Chief Cabinet Secretary Hirokazu Matsuno, who reaffirmed that the banking system is stable and that Japan wasn’t at risk of contagion.

Still, in addition to already challenging market conditions and pandemic assistant measures set to expire, the troubles of regional banks in Japan were exacerbated by the recent developments. Regional banks must contend with profit pressures amid the BOJ's ultralow interest rate policy, while exposure to foreign securities combined with rising U.S. interest rates have left regional institutions weakened and at risk of valuation losses.

Kiuchi said, while Japan’s banking system is robust overall, the low interest rate policy could weaken financial stability in the long term. As a result, careful shifts in policy would help ensure the system is even more stable.

As part of maintaining trust in the financial system, Ueda will also be tasked with reforming how policies are communicated.

Rebuilding confidence in the central bank’s ability to communicate will be an immediate priority, Adachi said.

The BOJ under Kuroda lost trust among some market participants and created a sense of unpredictability after a series of surprise moves by the former governor.

“The BOJ lost the policy tool (of) communication,” Adachi said.

“The important issue for the central bank is to communicate the market to the public with confidence — that makes a difference in sentiment, and sentiment is a key channel of policy to change the behavior of markets and the real economy,” he said.