Japan's central bank will start an interest rate meeting on Thursday under a new leader for the first time in a decade.
Bank of Japan Governor Kazuo Ueda is likely to maintain a steady monetary policy for now. However, all eyes will be on any hint that he may shift bank policy away from the era of super-easy money launched by his predecessor.
Haruhiko Kuroda stepped down earlier this month after two five-year terms in charge. The well-respected Kuroda was an appointee who took up the arrows of Abenomics and let them fly, in particular the first arrow, easy monetary policy. That arrow went hand in hand with the second, easy fiscal policy, under the late Japanese Prime Minister Shinzo Abe. The third arrow of structural change has been the hardest to land.
Ueda is an academic and an economist who is the first outsider to become Bank of Japan's leader. All previous central bank chiefs came from either inside the central bank itself or from Japan's finance ministry. While Ueda is hardly a revolutionary, he may have an independent streak. He's also free of the party politics that dominate Japan, with powerful factions operating behind the scenes to shape policy in backroom deals.
People who have worked with Ueda say he likely will be guided by the numbers and the economic evidence. He reportedly was not the first choice for BOJ chief of current Prime Minister Fumio Kishida. However, the top candidate, then-Deputy Governor Masayoshi Amamiya, turned down the job. The man known as "Mr. BOJ" said he had helped shape the existing monetary policy and wouldn't be independent enough to review it dispassionately.
The Bank of Japan's board that sets interest rate policy is due to meet on monetary policy on Thursday and Friday. The central bank should also release its quarterly forecasts for growth and inflation.
At Kuroda's last meeting, in March, the board voted unanimously to keep short-term interest rates in negative territory, at -0.1%, with long-term rates at or around 0.0%. The bank, which in December shocked markets by widening its permissible trading band for Japanese government bonds, kept that band at plus or minus 0.5% from the target.
Traders and banks have been clamoring for the BOJ to move away from these low and restrictive rates, which hurt bank and bond profitability. Traders bet heavily in January that the bank would expand the band further, but got that call badly wrong, as I explained at the time.
Kuroda deserves credit for helping shift Japan out of decades of deflation. He and Abe worked hand in hand to get Japan to believe in itself again, particularly big business known as "Japan Inc." Japanese multinationals have begun to invest capital and even raise wages, key effects that Kuroda and Abe had hoped to see.
There has been a temporary blip higher in inflation in Japan, but it's exactly that -- temporary -- based on the higher oil, food and shipping prices that are the legacy of the pandemic and the war in Ukraine.
It's anticipated that Ueda and his new team, including deputy governors Ryozo Himino and Shinichi Uchida, will opt to maintain the BOJ's current interest rate stance and asset purchase plans. Banking turmoil in the West has increased the importance of Ueda setting a solid base.
Ueda said earlier this week that the central bank's inflation forecast must be "quite strong and close to 2%," with temporary inflation not enough to push the BOJ to make a change.
"At present, trend inflation is below 2%, so we must maintain monetary easing," Ueda testified before the Japanese parliament. "But when trend inflation is projected to reach 2%, the BOJ must normalize monetary policy."
The Japanese government and the central bank have been trying to produce steady inflation of around 2% since 2013, but that goal it has proved elusive.
Core inflation, which excludes food prices but includes energy costs, was steady for March at 3.1%, the same as the previous month, according to data released last Friday. The inflation rate hit 4.2% in January, a 41-year high, but state subsidies have helped offset the high cost of utility bills.
Japanese companies finally have begun to raise prices, often after holding them steady for decades. That's the first step in producing long-lasting inflation. But the central bank is also desperate to see wages rise in tandem with prices.
The BOJ predicts that inflation will break back below its 2% desired level in the second half of this fiscal year, which runs through March 2024. It remained below that level for the vast majority of the last decade despite the best efforts of the BOJ and Abe administration. It only was pushed briefly higher by a sales tax increase.
Ueda declined to say when the BOJ might phase out its "yield curve control," the system that sees it ensure that bond yields trade within a certain range. He said the time to shift away from "YCC" would depend on the state of the economy, pace of inflation and other factors, no doubt with the recent bank failures in the West on his mind.
"At present, I can't say how this could be done," he told parliament. But Ueda, selected in part for his communication skills, has said that he may seek to disclose the BOJ's exit strategy in advance when the time comes.
It's likely that Ueda will initiate a review of BOJ policy as the bank prepares to make a change. Tokyo stocks have had a solid start to the year, with the broad-market Topix up 8.3% year to date. The yen has also eased pressure on the central bank by strengthening from north of ¥150 to the U.S. dollar in October 2022 to ¥133 now, a rate that has remained steady so far this year.
