Japanese Prime Minister Fumio Kishida says on Wednesday that he hopes his nominee to head the central Bank of Japan will help chart a course toward structural wage gains, as well as sustained growth for the world's third-largest economy, in outlining the intentions behind his choice.
Kishida's team on Tuesday put forward the surprise nomination of economist Kazuo Ueda to steer monetary policy at the BOJ. Ueda is the first outsider considered for the post, as I explained on Monday in previewing his selection, with previous central bank chiefs all coming from within the Bank of Japan or from the Japanese finance ministry.
Markets got in a temporary tizzy mainly because the frontrunner, current BOJ Deputy Governor Masayoshi Amamiya, was not being chosen, rather than because of anything Ueda specifically represents. When the Nikkei business daily broke word of Ueda's likely appointment, traders scurried to find out who he is, speed reading his papers and pronouncements to glean what he stands for.
The main impact is seen in the yen. The Japanese currency broke below the ¥130 level to the U.S. dollar on Friday, before word of Ueda's likely selection filtered through. It has now weakened near the ¥133.50 level, reversing the strengthening trend that had seen the yen come down from as weak as ¥150 to the greenback.
FX traders are also watching the U.S. Federal Reserve, of course. Market optimists who had been anticipating potential rate cuts in the United States later this year are generally pushing those predictions back, given strong U.S. jobs data and an inflation reading yesterday that slowed less than expected. Higher rates = stronger dollar = weaker yen.
Japanese bonds and equities sold off, but Tokyo trade has since settled down. The broad-market Topix equity index is virtually identical to its close on Friday, despite a 1.0% decline on Monday as markets dealt with the uncertainty of, well, who Ueda is.
The level-headed trading over the last two days shows markets do not expect a radical departure from current policy. Amamiya, nicknamed "Mr. BOJ," reportedly turned the job down, saying he is too closely connected to a monetary policy that he has helped design and implement. Even so, Kishida would be tipping his hand by approaching Amamiya, implying the prime minister does not want a dramatic departure from current policy.
Kishida says Ueda is the right fit because he is an economist with a global reputation and extensive financial expertise. Ueda's communication skills also reflect well, suggesting he will come forward to explain any changes in BOJ policy.
Ueda is an academic instead of an insider. He currently teaches economics at the Kyoritsu Women's University, although he still has ties to the BOJ as chief councilor of its think tank. He is also past dean of economics at the University of Tokyo.
Ueda did spend time on the BOJ's policy board, but that was between 1998 and 2005, so we can't look to his actions then for too much guidance on what he'll do now. Most famously, he voted in 2000 against the bank abandoning a zero-interest-rate policy. Since 2016, the bank has in fact been more extreme, pushing short-term rates into negative territory, at -0.1%.
Ueda is more likely to move away from current BOJ policy than an insider like Amamiya - but only because Amamiya was so highly unlikely to champion change. If Ueda is a raptor, he would be a sparrow hawk at best, and is really more likely to prove to be some species of dove.
Still, the outspoken economist Jesper Koll predicts that the yield on the 10-year Japanese government bond may quadruple to 1.75 or even 2% over the next 12 months, "if you ask me for investment advice."
Koll studied under Ueda, before going on to cover the Japanese economy for Warburg, J.P. Morgan and Merrill Lynch. "The key thing is he's completely objective," Koll, currently expert director of the Monex Group, said on Bloomberg. "He's a scientist." Koll believes Ueda will not push for any "quick win" once in charge and will instead demonstrate "very thoughtful" leadership.
Kishida's pick must still be confirmed by parliament. Although Ueda's confirmation is a gimme for the party in charge, which controls both houses of the Diet, his nomination hearings (scheduled for February 24) will be interesting to observe. Naka Matsuzawa, Japan macro strategist at Nomura, thinks speculation that the BOJ will abandon negative interest rates will likely dissipate as we get to hear from the candidate. At the same time, though, Ueda may want to revisit the 10-year yield target, with a potential suspension the most likely outcome.
The government and the central bank agreed in 2013 to strive to achieve a 2% target rate for inflation "as soon as possible." A decade later, they have finally got their wish, as Japanese price increases have crested to 4.0% as of the latest reading, largely on the back of higher fuel and food costs.
Ueda may change the wording on that target. The central bank may set the 2% target as a long-term ambition, with the interpretation of what that means up to the BOJ. Of course, "as soon as possible" turned out to take "a decade," and even then only came about because of the temporary disruptions stemming from a global pandemic.
Ueda did write a column in the Nikkei in July advising that the central bank should not prematurely tighten monetary policy because prices are suddenly rising in the short term. Wisely, he realizes the 4.0% current rate is not the "real" sustained inflation level, and cautions that suddenly tightening could hurt the economy and push Japan back toward the deflation it has worked so hard to depart.
Besides his vote to maintain a zero-level interest rate in 2000, he wrote critical commentary when the BOJ raised rates away from zero in 2006-07, on the back of five consecutive quarters of growth. They reached the heady heights of 1.5% later that decade before the BOJ was forced back into negative territory.
Ueda, correctly, says that small increases to the 10-year yield band do not help the cause. While the BOJ broadened the yield band by a tiny amount in December, the market surprise caused traders to front run further change, a call they got badly wrong, as I explained in January. The BOJ under Ueda may just ditch a target altogether, rather than keep adjusting it in small increments.
Matsuzawa at Nomura thinks the new central-bank governor will not want to give speculators ammunition and will ultimately oversee policy changes that outsmart the markets. Ueda has also expressed a willingness to explain his decisions and indicate the direction of his intentions.
Kishida, the prime minister, may get his wish. It looks like the annual spring wage negotiations between unions and employers may lock in a 1.3% increase in base salary, which would give a better underpinning to structural consumer spending. If wage growth comes sooner, and locks in that 2% inflation rate, we could finally see the Japanese central bank walk away from its policy of negative rates.
