GOVERNOR Kazuo Ueda is in a rare sweet spot for Japanese monetary officials as he weighs a historic policy move with virtually no political opposition, in sharp contrast to the experiences of his Bank of Japan (BOJ) predecessors.
Ueda’s BOJ has signalled clearly in speeches and minutes from board meetings that it intends to raise rates for the first time since 2007, putting an end to the world’s last negative rate regime. So far no politicians, government officials, bankers or business leaders have voiced strong opposition to the idea.
That opens the way for Ueda to proceed, with most BOJ watchers expecting the step to be taken by April. Data on Thursday (Feb 15) are expected to show the economy rebounded to annualised growth of 1.1 per cent in the fourth quarter after a deep contraction in the summer, supporting the case to lift rates.
The yen’s weakening against the US dollar to levels last seen in November would if anything be another incentive for the BOJ to make the move. Japan’s top currency chief Masato Kanda warned on Wednesday that recent currency moves had been rapid, and authorities were prepared to take steps if needed.
The US dollar jumped Tuesday in New York after hotter than expected United States inflation data for January cooled expectations of an early rate cut in the US.
In past cases of tightening or paring of monetary easing, the BOJ faced fierce criticism from various pockets of power. In one case the government officially appealed to authorities to postpone a move considered premature.
Knowing the clout of political influence over Japan’s monetary policy in the past, BOJ watchers have stayed on alert for any subtle signs of concern from Prime Minister Fumio Kishida’s government or ruling Liberal Democratic Party officials. Kishida has so far stuck with the government’s usual mantra that monetary policy should be left to the central bank.
“Ueda is in a different spot from past governors,” said Masamichi Adachi, chief Japan economist at UBS Securities and a former BOJ official. “People probably think enough is enough.”
Two main factors giving Ueda a green light are Japan’s elevated inflation trends and the weak yen, Adachi said.
Price gains have stayed above the BOJ’s 2 per cent target since April 2022. While the bank has attributed this to cost-push factors, citizens are weary of higher costs of living no matter what the cause, he said. The yen has stayed near a multi-decade low as the market focused on rate differentials with the US, forcing Japanese officials to stay on standby for possible intervention in currency markets off and on for months.
Ueda has been summoned to parliament twice this year after appearing there for about 20 days last year. In that time, questions from lawmakers have invariably focused on when and how the governor will achieve a soft landing after unwinding the most aggressive monetary easing programme in modern history. No one urged Ueda to postpone the move or step up the stimulus.
Since the introduction of subzero borrowing costs in 2016, it has not been received well. Sales of safes soared as households sought a way to protect their cash, and the policy shift was reported so widely by local media and tabloid magazines that the word “negative rate” was chosen as a buzzword for the year – a rare linguistic feat for a mundane central bank.
Masakazu Tokura, head of Japan’s biggest business lobby Keidanren, said in December that the BOJ should normalise policy “as soon as possible”.
“Japan is the only nation that has kept the negative rate,” Yoshihiko Noda, a former Prime Minister, told Ueda in November during a parliamentary session. “Japan’s monetary policy has fallen completely into a Galapagos syndrome.”
That description underscores the tough spot Ueda inherited when he assumed the helm in April. It also helps open the door for a change.
The BOJ’s past exits were seen as premature moves that cast doubts over its commitment to supporting the economy via ultra-easy policy. Former Prime Minister Shinzo Abe publicly said in 2014 that the government was against the end of quantitative easing in 2006 and scrapping the zero interest rate policy. Both events took place when he was chief Cabinet secretary.
Soon after the central bank raised the rate to 0.5 per cent in February 2007, the Cabinet Office released a statement saying its representatives who attended the BOJ policy meeting were opposed to the decision.
In contrast, Kishida seemed on board with Ueda as he has repeatedly emphasised his determination to completely end deflation. With his approval ratings having languished below 30 per cent for some time, he may choose to let the central bank unwind stimulus before declaring victory over deflation.
A recent funding scandal rocking the LDP took an especially big toll on the Abe faction, which had been a vocal supporter of aggressive monetary easing. The blow to that faction’s influence makes it easier for the BOJ to exit, according to BOJ watchers.
“The BOJ is likely to scrap the negative rate in April,” Adachi said. “The BOJ could frame that as good news to make a public appeal that the abnormal policy is finally over.” BLOOMBERG
