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Ueda nominated for central bank head as a BOJ-favoured 'outsider'

Bloomberg
Bloomberg • 6 min read
Ueda nominated for central bank head as a BOJ-favoured 'outsider'
Dubbed “Japan’s Ben Bernanke” by former Treasury Secretary Larry Summers, Ueda hasn’t had a say in BOJ policymaking since 2005. Photo: Bloomberg
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Japanese Prime Minister Fumio Kishida’s government nominated Kazuo Ueda to helm the Bank of Japan on Tuesday in a move likely to pave the way for a gradual paring back of the central bank’s full-bore stimulus.

Ueda, a university professor and former BOJ board member with a doctorate from Massachusetts Institute of Technology, is Kishida’s surprise choice to replace current Governor Haruhiko Kuroda.

“I’ll do my sincere best if parliament approves me” as BOJ governor, Ueda told reporters in Tokyo.

Dubbed “Japan’s Ben Bernanke” by former Treasury Secretary Larry Summers, Ueda hasn’t had a say in BOJ policymaking since 2005. His background gives him the billing of a neutral outsider with academic heft who can rationally judge how to reshape policy without a long-running attachment to the current stimulus setup.

“Ueda doesn’t have the strong policy color of Governor Kuroda,” said Junki Iwahashi, senior economist at Sumitomo Mitsui Trust Bank. “Changes are likely to take place, but he probably won’t rush them.”

By contrast, Deputy Governor Masayoshi Amamiya might have had more difficulty taking a neutral stance on any review of stimulus, given that he has been one of the key architects of policy over the last decade and more. Until news of Ueda’s likely nomination broke on Friday, Amamiya had been the favorite to land the top job at the BOJ.

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The surprise choice left many investors Googling Ueda’s name and assuming policy change would now likely come sooner rather than later. An initial strengthening of the yen and a rise in yields pointed in that direction.

For an outsider, though, Ueda has maintained enough contact with the BOJ to suggest he is a well known quantity for insiders at the central bank.

“Ueda will be welcomed by the BOJ as he is well known by the officials after maintaining a close relationship for decades. Among Japanese academics he is the best choice to take the helm,” said Shigeto Nagai, a former BOJ official and head of Japan research at Oxford Economics.

See also: ECB’s Vasle says more 2024 cuts probable in baseline scenario

“He’s likely to change Kuroda’s extraordinary measures to make them more neutral. That means he will navigate the BOJ to a policy centered on a short term rates eventually. But he’ll thoroughly assess policy so he needs time,” Nagai said.

Amamiya turned down the governor’s job when approached by the government, then recommended Ueda for the post instead, according to some media accounts.

When Ueda spoke to reporters on Friday after the yen strengthened, he issued a reassurance that could have been taken straight from the songbook of Kuroda or Amamiya.

“The Bank of Japan’s current policy is appropriate and monetary easing needs to be continued at this point,” he said.

The currency quickly pared its gains after the comments on Friday, suggesting that investors were starting to reassess the view that rapid change might be on the agenda.

Ueda has moderated a number of BOJ conferences over the years including a workshop in November on the mechanism of wage growth, a focal point for the BOJ as inflation rises to twice the pace of its 2% inflation target.

Under Kuroda, the BOJ has insisted that stimulus must stay in place until there are sufficient gains in pay to support stable inflation once import prices settle down.

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Ueda called on the BOJ to carefully watch developments in both inflation and wages, but added that it’s hard to predict the path of pay in Japan. As an economist he may be loathe to act quickly without seeing a large body of evidence.

A key BOJ decision Ueda is known to have taken issue with is the move away from zero interest rates in 2000. As a board member he had overseen the introduction of unconventional policy but argued that more time was needed to assess developments when the BOJ voted to ditch the policy and push up rates. He dissented.

Following last week’s news of his likely nomination, his out-of-print book about the zero interest rate policy got so popular that its price skyrocketed more than 18 times from its face value of 1,870 yen ($18.74).

When Ueda left the central bank in 2005, then BOJ Governor Toshihiko Fukui described it as the loss of a living encyclopedia.

“Just saying you have been a pillar of theory is too insufficient as an expression,” Fukui said at the end of Ueda’s last meeting. “You were the pillar that ensured our theory wasn’t just pie in the sky.”

Parliamentary hearings to scrutinize Ueda’s current views will start on Feb. 24. His nominated deputies, BOJ veteran Shinichi Uchida and former financial regulator Ryozo Himino, will also be quizzed in parliament as part of the confirmation process. Again, no women were selected for the top positions at the bank.

Market players will be checking that Ueda isn’t planning the fireworks that Kuroda set off at his first meeting a decade ago when he unveiled his massive bond-buying plans. The new governor is slated to start on April 9.

An important difference with Kuroda’s start at the BOJ is that Ueda will likely face intensive market speculation betting against the BOJ’s yield curve control from Day 1. Ueda warned against a premature tightening of policy in an article last year. He also pointed out the difficulty of managing a soft landing for the dismantling of yield control.

“Long-term yield curve control isn’t suited for policy tweaks,” Ueda wrote in the Nikkei article in July. “Once its ceiling is raised by a little, it will create market speculation for another rate hike, possibly sparking a massive selloff of government bonds.”

That’s exactly what the BOJ faced just weeks ago after it doubled the cap above its 10-year yield target in December, a move that intensified market expectations for a move toward normalization. The central bank spent a record 23.7 trillion yen in January to buy government bonds to keep yields under the new 0.5% cap.

Those bets against the BOJ are an indication of the pressure Ueda will face as he tries to chart a safe course away from the massive easing of Kuroda. Communication with markets will be critical as will getting the right take on how much he can hint at the policy direction without triggering waves of speculation.

Some 71% of BOJ watchers said in January that the central bank has problems with its communications strategy following the December tweak.

Ueda said Friday that he wants to conduct policy logically by looking at the outlook of economy and offering explanations that are easy to understand.

“As he’s a professor, he at least doesn’t have a clear political constraint on the direction of policy,” Iwahashi said. “But we still have to keep an eye on his skills of communication.”

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