Since taking office as governor of the Bank of Japan this month, Kazuo Ueda has cautiously signaled the continuation of policy. Few investors take his words at face value.
in the first change Bank of Japan With a governor in less than a decade, banking traditions broken, academics at the helm, and inflation reaching multi-decade highs, the stage is being set for change.
UedaThe first policy committee meeting, which began on Thursday, is about whether the 71-year-old economist is really committed to the status quo, or whether he’s laying the groundwork for unraveling Japan’s ultra-accommodative monetary policy regime. It will provide important clues.
Any change in policy would have a major impact on capital markets accustomed to large bond purchases by banks and interventions to control interest rates. Investors’ immediate concern is whether the BOJ, the policy introduced in 2016 to cap the benchmark’s 10-year yield curve, will further correct or abandon his control. about it. Japanese government bonds at almost zero percent.
Most economists expect Ueda to postpone changes to the YCC framework until the summer, but with speculative pressure on Japanese government bonds remaining low, he quickly surprised investors by scrapping it. may be
A big question that will determine Ueda’s five-year term is whether the central bank will eventually reach its 2% inflation target as prices and wages rise.
If there is sufficient certainty to reach the target, Ueda will be willing to relax the extreme policy measures deployed over the past decade that have boosted the BOJ’s balance sheet to 120% of Japan’s gross domestic product. I’ve already hinted at what I’m aiming for.
Governor Ueda told the Diet this week, “At present, the inflation rate is below 2%, and monetary easing will continue.” “If it is projected to reach 2%, we will be heading towards normalization.
Analysts have warned that the Bank of Japan and government will need to address a list of difficult issues if Ueda is to actually implement an exit strategy without destabilizing global financial markets.
“Dealing with the aftermath of quantitative and qualitative monetary easing will be costly and very difficult to balance,” said Ayako Fujita, chief Japan economist at JPMorgan Securities.
If Ueda amends or abolishes the YCC in the coming months, the Bank of Japan is expected to review negative interest rates, which only Japan has maintained.
However, removing the -0.1% deposit rate has been a slow process given the likely impact on the stock of floating-rate household mortgage debt since the policy was introduced in 2016. is expected to be
A massive asset purchase program under Mr. Ueda’s predecessor, Haruhiko Kuroda, has led the BOJ to own more than half of its assets in Japanese government bonds and locally listed exchange-traded funds. .
Paper losses on bond holdings increase significantly as interest rates rise, but since bonds can be held to maturity, this is unlikely to lead to realized losses.
ETFs, on the other hand, do not expire, so the Bank of Japan, currently the largest investor in Japanese stocks, could take a hit if stocks plunge. Despite raising it to 12 trillion yen ($90 billion), the BOJ has sharply scaled back its purchases, acquiring 140 billion yen this year.
“As ETF exit strategies have the potential to destabilize the stock market, the Bank of Japan is likely to treat them with special caution, and the start of serious discussion on the issue will likely be delayed until Governor Ueda’s term of office. It may not start until the end of the period,” said Naohiko Baba, Japan economist at Goldman Sachs.
Another major risk factor is that inflation remains high and the US could slip into recession if the Federal Reserve returns to aggressive rate hikes again. This puts selling pressure on the yen again.
A slowdown in the Japanese economy’s spillover could kill inflationary momentum in the same way that inflation began to widen beyond the rising cost of imported energy caused by the war in Ukraine.
So-called core-core consumer prices, which exclude all food and energy, rose 2.3% in March, and inflation was not driven by underlying consumer demand and is likely to fall short of target later this year. I questioned the Bank of Japan’s assertion that
“They’re starting to say it might be different this time,” UBS economist Masamichi Adachi said, citing big companies and companies wanting to raise prices to reflect rising costs. . “But we are not yet in a position to confidently say that this time is different.”
