An unexpected choice to lead the Bank of Japan faces a difficult choice

Over the past few months, many have been mentioned as possible replacements for Haruhiko Kuroda, the long-serving governor of the Bank of Japan who led the country’s decades-long experiment with extremely easy money and lowest interest rates.

Kazuo Ueda, who was officially nominated for the job Tuesday, was not among them.

But it is Mr Ueda who, if approved by Congress, will assume the governorship under intense scrutiny, as markets around the globe are looking for any sign of a change in the economy’s monetary policy. the world’s third largest economy and largest creditor.

Mr. Ueda, 71, will be the first scholar in the post-war era to become the top leader of the central bank, a position usually reserved for an official from the finance ministry or the bank itself.

It’s been an impossible task: Over the last year, rising inflation and a falling yen have tested Japan’s tough commitment to monetary easing, including a bond-buying program. giant to keep interest rates low.

Since last summer, Japan is one of the major central banks in the world that has sharply raised interest rates in an effort to curb inflation. Fiscal hawks have called on the Japanese government to roll back its monetary policies, which they say have done too little for the dollar and turned the government into a spendthrift. . Financial speculators, too, tried to force the bank to abandon its position, hoping to make a profit if the bank retreated.

In December, Mr. Kuroda surprised the market by raising the bond yield ceiling, effectively raising interest rates. The move, which Mr. Kuroda said was aimed at improving the functioning of the bond market, only fueled speculation that the bank was planning a major policy change.

The result is huge: In January, the Bank of Japan spent nearly $179 billion buying bonds to keep interest rates a priority.

The decision on whether to continue this policy or not will rest with Mr. Ueda.

How he will proceed is an open question, but his background shows he is incapable of making any sudden changes. Years ago, as a member of the bank’s policy committee, he was an early supporter of the unconventional economic ideas that now shape Japan.

Jesper Koll, director of financial services firm Monex in Tokyo, said the market may not be familiar to him, but he is known as a thoughtful, cautious thinker with “an amazing academic credentials. surprised”.

“There is an appreciation for reflexes, an appreciation for thinking, rather than an appreciation for quick wins and immediate action,” said Mr. “The number one signal is that there is no urgency to do anything radical, and there is also the openness to start doing things in a new way.”

It is not clear how Japan was able to gracefully reverse long-standing policies focused on increasing inflation that had stalled for decades before the pandemic. The theory is that cheap money will encourage moderate inflation to stimulate corporate profits. That would translate into higher wages for workers who haven’t seen their wages rise in years. With more money in their pocket, they spend more, creating a virtuous cycle.

However, that goal is both elusive and costly. Over the past decade, the Bank of Japan has purchased more than 50% of all outstanding government bonds and has become one of the largest players on the Japanese stock market. Businesses and households become dependent on low-interest loans; Many homeowners have variable-rate mortgages, which will increase with any increase in interest rates.

Inflation is now at a 40-year high, but Mr. Kuroda and others argue that the price increase is due to temporary factors – a weak yen and supply chain disruptions – not daily demand. increase that the bank has sought to stimulate.

How the bank conducts itself is not only a domestic concern. Japan’s monetary policy process has implications for many countries that see it as a major investor and lender.

Markets around the world have spent months looking for signs of Mr Kuroda’s replacement, hoping for a hint of the bank’s future.

But last Friday, when the Nikkei Shimbun, Japan’s business daily, reported on Mr Ueda’s selection, the scoop came as a complete surprise to the Bank of Japan’s followers. everywhere.

For months, speculation has mostly focused on two candidates. In recent weeks, smart money has been in the right hand of Mr. Kuroda, the bank’s deputy governor, Masayoshi Amamiya.

One of the architects of Japan’s current monetary policy, Mr. Amamiya is seen by many as a safe pair of hands — unlikely to make any sudden, potentially destabilizing adjustments. any for the current policy. He is also seen as the preferred choice of the powerful conservative political faction once headed by former Prime Minister Shinzo Abe.

Despite Mr Abe’s assassination last summer, the group remains the driving force behind the ruling party’s politics and a strong supporter of Abe’s unusual monetary easing measures. after he took office in 2012.

That group’s preferences were most likely a key factor in Prime Minister Fumio Kishida’s selection of Ueda, according to Takehide Kiuchi, executive economist at Nomura Research Institute. Mr. Kishida was probably looking for a candidate that would be “accepted by conservatives of the LDP, who oppose the monetary easing amendments,” he said, referring to the ruling Liberal Democratic Party. .

“It can be expected that Mr. Ueda will “calmly analyze the effects and side effects of individual monetary policies, while carefully taking necessary measures to mitigate the effects,” Mr. Kiuchi said. side effects”.

Mr. Ueda graduated with a Ph. in economics at the Massachusetts Institute of Technology, where he shared dissertation mentorship with Ben Bernanke, who later became Fed chairman. Mr. Ueda has taught at the University of Tokyo and Kyoritsu Women’s University, where he currently works.

He served on the policy department of the Bank of Japan from 1998 to 2005. When he joined, the bank had just gained statutory independence and Mr. Ueda was a key person in driving innovation, Gene Park, a professor of political science at Loyola, said Marymount of Los Angeles, who has written about the Bank of Japan.

On the board, Mr. Ueda was one of the first to recognize the potential deflationary risks and suggested responding with unorthodox measures, Mr. Park said. Mr. Ueda was an early advocate of setting a specific inflation target and shaping public expectations for price increases through a process called forward guidance. The bank then incorporated both ideas into its policy framework.

In 2000, Mr. Ueda was one of two members of the bank’s policy council that voted to continue experimenting with zero interest rates.

“At the time, I really thought he was the only policy board member who was a real monetary policy expert,” Park said, adding that he was “against the flow.” .

More recently, he has emphasized the importance of taking a cautious approach to changing the country’s monetary policy. “The Bank of Japan needs to establish an exit policy” from its current unorthodox framework, he wrote in The Nikkei in July. However, he was not clear on when or how that could happen.

Speaking to reporters after learning of his appointment on Friday, Mr Ueda said he felt “the bank’s current policies are appropriate”.

However, many experts believe he will undertake a broad review of the existing monetary framework.

Paul Sheard, a former chief economist at S&P Global who has known Mr Ueda for decades, said if anyone was ready for the job, it was Mr Ueda, who is seen by academia as a leader. of Japan’s leading economic minds.

“The stakes are really high at the moment,” said Mr. Sheard. “Hopefully history will look back on his tenure as governor and say that this is the governorship that can steer monetary policy out of that deflationary war, unusual territory, and get things back on track.” back to something a little more ordinary.”