BoJ’s Ueda Takes First Step Towards Policy Normalization
BoJ’s chief Kazuo Ueda presenting at the European Central Bank (ECB) Forum on central banking.
One year into his tenure, Bank of Japan’s (BoJ) Governor Kazuo Ueda accomplished his first major task by ending Japan’s era of negative interest rates and yield cap program. This marks a transition from his predecessor Haruhiko Kuroda’s massive monetary easing campaign since taking office on April 9th, 2023.
For the first time in 17 years, according to the BoJ official website, the BoJ has implemented a rate hike, abandoning negative rate policies and introducing short-term interest rates ranging between zero and 0.1 percent. The removal of the cap on 10-year Japanese government bond yields also signals a shift away from aggressive bond-buying and artificial low yields, shifting back to a more normalized policy stance.
Ueda’s policy aims to simplify the approach of Kuroda, his predecessor. Kuroda’s aggressive monetary easing campaign, associated with former Prime Minister Shinzo Abe’s “Abenomics” program, was a complex framework aimed at ending deflation and achieving a two percent inflation target, wrote the Council on Foreign Relations. The campaign emphasized a focus on Japan’s interaction with the global economy. However, Abenomics came with side effects, including asset bubbles, challenges for financial institutions, and market distortions, complicating the Japanese economy.
This policy overhaul follows a year of robust wage growth, reports the Japan Times, instilling confidence in the BoJ's ability to achieve its inflation target of 2 percent after decades of deflation. Global financial markets have since responded calmly to these changes, writes Kyodo News, with analysts anticipating the BoJ's alignment with global peers.
However, Ueda also acknowledged in a speech to a parliamentary table that the policy changes “were made possible because economic conditions were relatively good,” reports the Mainichi. “We will respond to changes in the economic environment appropriately under the new framework,” Ueda added. Shinichiro Kobayashi, senior economist at Mitsubishi UFJ Research and Consulting, stated, “The BOJ has finally aligned itself in the same direction as its U.S. and European peers after a long delay.”
However, writes Bloomberg, the yen remains weak—¥150 level against the dollar in the last week—signaling that market expectations for a rate hike might not yet occur. Additionally, despite terminating the yield curve control program, which is intended to control the Japanese Government Bond (JGB) yields to around zero percent, the BoJ will buy a similar amount of JGBs to avoid massive interest rate hikes. Though the first interest rate hike marks a historical change, the Japan Times reports, in order to avoid sudden swells in the economy, Ueda has promised that “the primary policy instrument to manage the monetary policy from now on will be short-term interest rates.”
Ueda’s monetary policy intends to stress a more domestic focus, taking into account how consumer tendencies affect price hikes. Shuntō, otherwise known as the “spring wage offensive,” is an event in the spring Japanese market where labor union representatives negotiate wage increases. Previously, according to Nippon.com, Ueda has stressed the potential of shuntō to maintain stable inflation; however, the Japanese domestic economy remains relatively sluggish, increasing the likelihood of a delayed wage hike.
On an international scale, several factors complicate the BoJ’s job. Because the U.S. Federal Reserve is considering rate cuts, writes Reuters, if the BoJ also raises its rates, the yen would gain value too rapidly and increase borrowing costs for the government.
Ueda faces the challenging task of transitioning away from the previous era of Abenomics. However, with his five-year tenure as BoJ governor set to last until 2028, Ueda has the opportunity to implement gradual yet decisive policy changes aimed at restoring stability and fostering sustainable growth in the Japanese economy.