After his first weekday as the new governor of the Bank of Japan, Kazuo Ueda led a press conference yesterday as markets braced for a reversal in policy from that of the outgoing governor Haruhiko Kudora. Ueda assured the press that, “We will continue the monetary easing adopted by the previous leadership,” and that the BOJ’s task of achieving stable levels of about 2% inflation was “the project of many years,” and one that he wishes to continue. He also signaled the continuation of two of his predecessor Kudora’s more controversial expansionary maneuvers: negative interest rates and yield curve control (purchasing long-term government securities en masse), in spite of the fact that Ueda previously hinted that the latter would not feature under his policy regime.
Expectations for a policy reversal under Ueda came as Japan experienced a core inflation rate of 4.2% in January of this year, its highest since 1981, as well as the yen’s slide to a 32-year low relative to the US dollar towards the end of Kudora’s ten-year tenure, reflecting the two currencies’ increasing disparity in interest rates. Nonetheless, Ueda predicted that Japan’s recent inflationary highs “should be the peak for now,” sharing Kuroda’s concerns that the rate would sharply decline in April.
In spite of Kuroda’s best efforts, the yen has seen annual inflation rates usually within the range of 0 to 1% over his tenure, with the exception of rising prices since the pandemic, the origins of which remain contested. Many argue that an obstacle in the way of the BOJ’s 2% inflation goal is not a liquidity trap but an expectations trap. When the yen saw growing inflation across 2007 and 2008 the BOJ countered such with an increase in interest rates. It’s speculated, in turn, that the BOJ has been largely forced to bow down to pressures from the United States and other trade partners of Japan, who may accuse the country of currency manipulation if it were to achieve a higher natural rate of inflation. Although exports would, indeed, immediately increase if the yen were to experience higher inflation, a corresponding improvement in economic growth could also boost imports into the island country, casting doubt on countries’ worries for Japanese inflation in the first place.
In light of these speculations, pressures have again mounted on the BOJ to suspend its yield curve control policy, which entails the central bank targeting a 0% yield in 10-year government bonds. Although the BOJ lifted the cap on 10-year yields from 0.25% to 0.5% in December, recent bank failures in the United States may prove insufficient, in the eyes of analysts, to stave off future calls to either lift or abolish the cap altogether.
Meanwhile, historical low levels of inflation in Japan have benefitted US exports to the island, particularly the United States’ petroleum, agricultural, and pharmaceutical industries who predominantly comprise the two countries’ trade relationship, with Japan being the US’s fourth largest trade partner. In contrast, expansive policy measures from the BOJ such as capping the government yield curve artificially lowers the returns of investors in Japanese government debt, many of whom being financial institutions operating out of the United States. Thus, the fate of Japan’s monetary regime under Ueda may present mixed signals to the United States’ economy, with a stable and higher inflation rate in Japan potentially aiding the United States’ receipt of Japanese goods such as automobiles and other construction vehicles, providing much needed lower prices to such domestic industries. Conversely, inflationary pressures in Japan may send government debt yields higher and benefit United States investors.
In sum, however, Ueda has inherited a difficult situation as governor of the Bank of Japan, having to navigate foreign pressures while boosting domestic inflation.