By Anaïs Penin
Recently, Japan’s Prime Minister Kishida appointed the new Governor of the Bank of Japan, Kazuo Ueda, to succeed Haruhiko Kuroda whose five-year term will end in April. This change is decisive for Japan which is currently facing economic difficulties. Japan has not only reached the highest level of inflation in 42 years, but it is also experiencing rising prices of imported raw materials. The new BoJ Governor will thus face a difficult task in stabilising the Japanese economy.
© The Japan Times
History of Japan’s Economy
In the 1970s, Japan produced the second-largest Gross Domestic Product (GDP) in the world after the United States. In the nineties, however, the country had to deal with a long period of economic crisis and deflation. This was, partly, because of the extremely low-interest rates that amplified real estate and stock market speculation. To pop the speculative ‘bubble’, the Bank of Japan (BoJ) quickly raised interest rates, leading the stock and bond market to crash. In the last decade, the current Governor has tried to combat the resulting deflation by stimulating growth with unconventional tools, including large asset purchase programs.
The Japanese Economy Today
Unlike other central banks, such as the American Fed and the European ECB, which raised their rates to limit inflation, the BoJ keeps these rather low. It allows the central bank to support the Japanese economy while maintaining easy access to cheap loans in the national currency, the yen.
So far, current Governor Kuroda has been using a ‘quantitative and qualitative easing’ policy since 2013. This accommodative monetary policy boosts the economy by purchasing considerable financial assets. It also included a stimulus program of ‘yield curve control’ that keeps interest rates at an ultra-low level to generate growth by making borrowing cheaper and more attractive to consumers and businesses.
However, inflation in Japan has been very high lately. Indeed, it is said to be the highest it has been in 42 years and more than the Bank of Japan’s two per cent target. Japanese historians studied the level of inflation in Japan and went back to 1981 to find a similar number as the four per cent measured in Japan in December 2022. At that time Japan was growing at a rate of over four per cent. In 2021, Japan's growth was a little over one-and-a-half per cent.
Today, inflation is hurting Japan. Rising prices are putting some firms and consumers at risk and are accompanied by rising energy, telephone, and food bills. According to a Japanese analysis bureau Teikoku Databank, 6,376 companies declared bankruptcy in Japan last year.
Why Kazuo Ueda?
Some observers emphasize that the present monetary stimulus has hit its maximum capacity. There have been several analyses about potential successors and, thereby, which monetary policy the BoJ would conduct. Masayoshi Amamiya, the deputy governor, was expected to be the government’s preferred candidate as this would have meant a continuity in the BoJ’s monetary policy. Is it, therefore, surprising that Kazuo Ueda will succeed Haruhiko Kuroda or was it a strategic choice of the Japanese government?
Ueda is a professor at Kyoritsu Women's University. He was a member of the BoJ board from 1998 to 2005, the period in which the zero-interest rate policy was first introduced. He voted against the policy, but it was implemented anyway. It is now possible that the Bank of Japan's monetary policy will change.
On 17 January 2023, the value of the yen was at 138.33 yen per euro. The currency is still holding up while some people believe Japan may allow yields on government bonds to rise, which would raise interest rates and possibly beat inflation.
The choice of the head of the BoJ was very important, as it will decide the monetary policy of Japan for the next few years. Prime Minister Fumio Kishida said: “I’m considering the selection by paying close attention to the potential impact on financial markets”.
Will Kazuo Ueda End Japan’s Decade-Long Policy of Zero-Interest Rates?
TheBank of America Global Research stated that the new leadership will lead to a gradual policy normalization, instead of an abrupt change. Governor Ueda seems reluctant to proceed with an interest rate hike. In fact, the Japanese economy has been supported by an extremely-low interest rate policy for over 40 years and raising interest rates, as other central banks do, would dangerously damage the economy.
The Japanese are currently used to being able to borrow at extremely low rates. Raising these would endanger the Japanese economy and purchasing power. On the other hand, not following the international trend of raising interest rates would result in the yen losing even more value against the euro and dollar. Since Japan is heavily dependent on other countries for their raw materials import, a continuing low-interest rate policy would mean that the price of such goods would become even more expensive.
The ‘Yield Curve Control’
Ueda’s upcoming administration is expected to study the benefits and disadvantages of the unusual monetary easing policy in detail, as well as other possible policies. Kazuo Momma, the former BoJ assistant governor said that, unlike ten years ago, it is necessary to find a sustainable policy to achieve and maintain a two per cent inflation rate.
Momma stated that Ueda might completely abandon the ‘yield curve control policy’, but Ueda mentioned that it is very complicated and that he does not want to upset market actors. In fact, some Japanese investors are concerned about the abandonment of the ‘yield curve control’ because this will lead to higher interest payments and more taxes now that economic actors are already in financial difficulties. Upcoming Governor Ueda must, if he wants to change the policy, reassure Japanese people and firms who fear a drastic change in the BoJ's monetary policy.
Conclusion
The Bank of Japan’s objective is to achieve economic growth that implies rising wages and that respects stable and sustainable price targets. The change in leadership and the initial surprise of Ueda’s election have raised concerns and the necessary scepticism. Opinions on what monetary policy to pursue in Japan are diverse.
Will the arrival of Kazuo Ueda soon lead to a change in Japan's current zero-interest rate stimulus policy? It might not be this year, but some hope he will change the policy and create a new ‘exit’ or ‘normalisation’ policy, which will change the inflation targets, while others believe that he will stick with the current policy. Wherever Ueda leads Japan, it will define the Japanese economic legacy for years to come.
Sources: BBC, Bloomberg, CNCB, Financial Review, Le Figaro, Nikkei Asia, The Washington Post
Written by Anaïs Penin
February 2023