Bank of Japan’s Next Chief Says Monetary Easing Policy Still Necessary

A man walks past Bank of Japan's headquarters in Tokyo on June 17, 2022. Kim Kyung-Hoon/Reuters

Bank of Japan (BOJ) governor nominee Kazuo Ueda said on Friday that maintaining Japan’s monetary easing policy is necessary to support the economy, despite the side effects it has on financial intermediation.

At a confirmation hearing in parliament, Ueda said that he believed it is “appropriate” to continue monetary easing to achieve the bank’s 2 percent inflation target but that he would consider examining the side effects.

“It’s true the policy is having a negative impact on financial intermediation. But the BOJ has taken various steps to ease the side effects. Financial institutions have sufficient capital buffers,” Ueda said.

“If I were to be appointed governor, I will discuss that with other board members and consider doing such an examination as necessary,” he added, according to Reuters.

Upon approval by parliament, Ueda, a 71-year-old former BOJ policy board member, is expected to succeed incumbent Haruhiko Kuroda, whose second five-year term ends on April 8.

The appointment of Ueda came as a surprise to many investors who expected the job to go to a career central banker like deputy governor Masayoshi Amamiya.

Kazuo Ueda, a former member of the Bank of Japan's policy board, at the headquarters of Bank of Japan in Tokyo on May 25, 2022. Kyodo via Reuters

Ueda said the BOJ could move toward normalizing monetary policy when more signs of achieving the inflation target come into sight, but for the time being, Japan needs to create an environment where companies can raise wages.

“When the time comes to exit ultra-loose policy, the BOJ must think about how to phase out its ETF holdings. But there’s some distance to the actual timing [of an exit], so it’s premature to offer information on how specifically the BOJ could do this,” he said.

“In the event the BOJ tightens monetary policy, it will likely raise interest rates applied to financial institutions’ reserves with the central bank,” Ueda stated.

Rising Inflation

Japan’s core consumer inflation hit a fresh 41-year high in January as companies passed on higher costs to households, data showed on Friday, keeping the BOJ under pressure to phase out its massive stimulus program.

The nationwide core consumer price index (CPI), which excludes volatile fresh food but includes energy costs, was 4.2 percent higher in January than a year earlier, matching a median market forecast and accelerating from a 4 percent annual gain in December.

Core consumer inflation has now exceeded the Bank of Japan’s 2 percent target for nine straight months, mostly reflecting persistent rises in fuel and raw material costs, the data showed.

Ueda said the recent acceleration in inflation is driven largely by rising import prices, rather than strong demand. He projected that consumer inflation will fall below 2 percent in the latter half of the next fiscal year.

“It is said that the effect of monetary policy takes half a year, or two to three years at the longest, to appear. ... What’s important in gauging the outlook is to look at trend inflation,” he said.

“There are some positive signs in trend inflation. But there’s still some distance,” Ueda added.

The world’s third-largest economy expanded an annualized 0.6 percent in the final quarter of last year after slumping a revised 1 percent in July–September, government data showed last week.

The increase in gross domestic product (GDP) was much smaller than a median market forecast for a 2 percent rise, due to a downswing in capital expenditure and inventory.

While private consumption rose 0.5 percent and external demand added 0.3 percentage point to growth, capital expenditure was a drag on the economy, falling a bigger-than-expected 0.5 percent, the data showed.

Reuters contributed to this report.