The surprise selection for Japan's next central bank chief testified to lawmakers on Friday ahead of almost-certain confirmation by mid-March. Traders are eavesdropping on every word of the confirmation hearings as they've had slim pickings of pronouncements from Kazuo Ueda prior to now.
Ueda is an economist and an academic and would be the first Bank of Japan governor to come from outside the ranks of the central bank or Japan's finance ministry.
When Ueda was quizzed on the impact of higher prices, he said it is too early for the central bank to abandon its super-easy monetary policy. He warned that responding to current inflation would likely be an overreaction.
"Japan's trend inflation is likely to rise gradually," Ueda told the Lower House of the National Diet, Japan's parliament. "But it will take some time for inflation to sustainably and stably achieve the BOJ's 2% target."
Near the end of one session, a lawmaker asked Ueda how he personally has been affected by higher prices. Ueda responded that at the university he buys a bento-box lunch from a convenience store every day and has seen the price rise from ¥450 or so to above ¥500 -- in other words more than 10%.
Ueda would assume the top BOJ post at a delicate time. Fresh numbers on Japanese inflation came out today that show it stood at 4.2% for January. That's the highest reading in 41 years, up from 4.0% the prior month. The last time prices were rising this fast in Japan was in 1981, when the impact of the 1979 revolution in Iran caused an oil crisis as production fell.
Japan imports all its oil, so higher energy costs are again the chief culprit behind its rising prices. Higher prices for oil are filtering through across the production chain. However, wages have not shown signs of sustained gains and the BOJ says it can ease up only when that happens.
Ueda, 71, is a former dean of economics at the University of Tokyo as well as a former BOJ policy board member, although he left that position in 2005 and has kept a low profile. As a result, traders and investors have turned to his one-off newspaper articles for guidance on his current position and as a guide for the kind of course that "his" central bank will keep.
Ueda testified today alongside the two men nominated to serve as his deputies, former Financial Services Agency commissioner Ryozo Himino and current BOJ executive director Shinichi Uchida. All three will have to submit to confirmation hearings in the Upper House of the Diet. But with the ruling Liberal Democratic Party controlling both houses, their confirmation should be a procession if all goes to plan.
Japanese Prime Minister Fumio Kishida shocked markets when he put Ueda forward for the central bank post, as I explained in previewing the move. The indications had been that Kishida would turn to a man known as "Mr. BOJ," Masayoshi Amamiya, as the next governor. But Amamiya, the current deputy governor, reportedly turned the offer down, saying he would not be in a position to assess the BOJ's policy dispassionately because he had helped craft it.
Tokyo trading got in a temporary tizzy as Ueda was put forward, as we discussed last week. But the moves in bonds and stocks have been short-lived.
The Japanese government and the central bank agreed as far back as 2013 to try to sustain inflation at a rate of 2%, after decades of economically devastating deflation. They've had their wish for each of the last nine months, although economists expect January to mark the inflation peak.
There's a lot of talk that the central bank is under pressure and that its yield curve control policy can't continue. To be honest, most of that pressure seems to come from bond traders betting that the central bank will need to diverge from its current course. So far, they have not gotten their wish. Their attempts to front-run the central bank then led to louder calls from them that the central bank surely can't continue this way.
But it can. Even at 4%, Japanese price gains are hardly earthshaking, particularly if they are unlikely to last beyond this year. The BOJ's surprise adjustment to the yield curve trading band in December simply bought it more time to keep rates low, relieving a little pressure on the yen. The currency has been very weak, moving north of ¥150 to the U.S. dollar in October, its highest exchange level since 1990, mainly because Western interest rates have risen so fast while Japan and China have stood pat.
Consequently, Japan's central bank is under little of the same pressure that the U.S. Federal Reserve and the European Central Bank feel in attempting to corral inflation running near a double-digit pace. In his testimony, Ueda was asked whether BOJ policies have resulted in yen depreciation. He said he "cannot deny" that low rates in Japan have contributed, but that the most significant factor is rate increases in the United States. He is correct.
Kishida put forward Ueda's name on Feb. 14, though the choice was leaked after markets closed on Feb. 10. The main movement has come in the Japanese yen. The currency was trading at ¥131.29 to the U.S. dollar before Ueda's selection became likely and has now weakened to around the ¥135 level. That indicates "low for longer" is the likely outcome for Japanese rates.
Japanese stocks rose on Friday, with the broad-market Topix closing up 0.7%, and the Dow-like Nikkei 225 notching a 1.3% rise. Major Japanese exporters, which exert greater influence on the Nikkei 225, benefit from a weak currency that makes their goods cheaper and inflates their overseas revenue. Japanese markets were closed for a holiday on Thursday in celebration of Emperor Naruhito's birthday on that day in 1960.
Other East Asian markets moved lower on Friday, with the Hang Seng down 1.7% in Hong Kong, Taiwan stocks down 0.7% and South Korea off 0.6%. There were very slight gains in Australia and New Zealand following advances on Wall Street the day before.
Current BOJ Governor Haruhiko Kuroda will step down on April 8 after a decade in charge. Ueda's first policy meeting would come on April 28, when the central bank is due to release its inflation forecasts through 2025.
Kuroda came into the post soon after late Prime Minister Shinzo Abe took power. Under their watch, the BOJ made the controversial move of shifting to negative interest rates in 2016, something it has maintained in its bid to produce inflation that sticks.
Ueda said on Friday that he believes Kuroda's approach was "unavoidable." While the initial expectation was that a 2% rate could be achieved in a short period of time, "it has taken a long time due to various external shocks." When asked if 2% inflation is appropriate, he said it is a "global standard inflation target."
One reason Kuroda selected Ueda for the top job (besides no one else apparently wanting it) is that, as an economics professor, he has strong communications skills. Asked whether he would share Kuroda's penchant for surprises, Ueda said "it is inevitable that there will be surprises from time to time," but that it is "possible to minimize such surprises by explaining our thinking in a simple and plain manner."
