The new governor of the Bank of Japan (BOJ), Kazuo Ueda, affirmed that the current monetary easing of the central bank is necessary and considers “appropriate” its current program of keeping borrowing costs extremely low, in what was its first conference press.
As reported by Kyodo News, Ueda acknowledged that prolonged monetary easing has side effects that need to be closely watched, suggesting that a “broader” review of BOJ monetary policy over the past decade and beyond could be in the offing.
The Bank of Japan governor said he will strive to achieve the 2% inflation target, which the central bank has long pursued, despite being challenging.
The decision to maintain the BOJ’s yield curve control program depends on economic, financial and price conditions, and the central bank needs to “weigh the merits against the side effects,” said Ueda, who is the first head of the Postwar BOJ from academia.
“Based on current conditions, it is appropriate to maintain” the yield curve control program, he said.
On his first day in office as governor, Ueda visited Prime Minister Fumio Kishida in his office and agreed that there is no need “for now” to review a 2013 joint agreement. The agreement has served as the basis for monetary easing in the central bank to achieve its inflation target.
The BOJ has been forced to increase government bond purchases to keep short- and long-term interest rates within a target range, and its bulging balance sheet poses a formidable challenge to the central bank when it decides to normalize policy.
Financial markets expect the yield curve control program to be modified or eliminated under the new leadership.
Although the Bank of Japan has yet to reach 2% inflation on a “stable and sustainable” basis, headline inflation has remained above that level for almost a year. The rise was mainly due to higher energy and commodity prices, exacerbated by the sharp fall in the yen, a by-product of the central bank’s dovish stance.
“We would like to see trend inflation rise a bit more, so the outcome of shunto (corporate wage negotiations) has been encouraging so far,” Ueda said. “That being said, we have to see if this growth will hold from the point of view of hitting the 2% target on a stable and sustainable basis.”
Poor wage growth is one of the main reasons why Ueda’s predecessor, Haruhiko Kuroda, justified maintaining powerful monetary easing.
After meeting with Kishida, Ueda said they shared the view that Japan is no longer in a state of deflation due to the policy measures taken over the past decade in line with the agreement.
Ueda said that he and Kishida agreed to maintain close communication and apply flexible policies depending on economic conditions.
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In the deal, the Bank of Japan pledges to reach its 2% inflation target “as soon as possible,” while the government pledges to take steps to promote structural reforms and boost Japan’s growth potential.
Critics call for a review to make the target more flexible, but Ueda has said he sees no need to revise the deal.
Kishida’s choice of Ueda surprised financial markets, but the selection was made based on the view that the renowned economist’s experience and insights will come in handy as the central bank faces myriad challenges.
Kishida has stressed the need to redistribute wealth, while urging companies to step up wage hikes to keep pace with accelerating inflation.
Ueda studied Economics at the Massachusetts Institute of Technology and taught at the University of Tokyo. As a member of the BOJ’s decision-making council from 1998 to 2005, he witnessed the central bank’s foray into uncharted territory with zero interest rates and quantitative easing.
