Next Bank of Japan head Kazuo Ueda calls for ‘creative’ monetary policy

The Bank of Japan should be “creative” with its monetary policy and pursue interest rate normalisation if it appears able to sustain its 2 per cent inflation target, the central bank’s expected next governor Kazuo Ueda has said.

Addressing Japan’s Diet on Friday for the first time since his nomination this month, the 71-year-old economist signalled that he was in no rush to change Japan’s ultra-loose monetary policy, explaining that future decisions would hinge on the inflation outlook.

In comments that appeared to be intended to avoid disruption to financial markets, Ueda acknowledged that it would take time for Japan’s price growth to be maintained at the BoJ’s target level. He warned that tightening monetary policy under current conditions could slow the economy, as current inflation was not driven by underlying strong demand.

“There have been various side effects, but in light of the economic and price conditions, the methods have been necessary as well as appropriate to sustainably achieve the 2 per cent inflation target,” Ueda said, referring to the BoJ’s adoption of negative rates and yield curve control under incumbent governor Haruhiko Kuroda.

“I believe it is appropriate to continue monetary easing measures while being creative in line with the situation,” Ueda added.

Currency markets were little moved following Ueda’s comments, while Japan’s benchmark Topix was up 0.7 per cent and 10-year Japanese government bond yields fell slightly.

Global investors had eagerly awaited Ueda’s parliamentary hearing after Prime Minister Fumio Kishida broke with precedent by nominating an academic for central bank chief, a role that historically rotated between officials from the BoJ and finance ministry.

Many economists expect Ueda to gradually exit from two decades of quantitative and qualitative easing that has swollen the central bank’s balance sheet with massive purchases of ETFs and Japanese government bonds to keep yields low. The BoJ is also the last major central bank still holding on to negative interest rates, currently at minus 0.1 per cent.

Ueda is known as neither a monetary policy dove nor a hawk. Analysts said his comments confirmed the view that he would take a pragmatic approach to decision-making that drew on market and economic conditions rather than ideology.

Addressing whether the BoJ would shift towards normalisation or maintain easing measures, Ueda said: “My biggest mission is to make sure that I do not make a mistake in making the decision in response to economic developments.”

“It was a very balanced testimony,” said Masamichi Adachi, chief Japan economist at UBS. “He made it clear that if the price trend does not improve, then the BoJ would continue with easing measures while reducing their side effects.”

Ueda spoke after government data showed on Friday that Japan’s core inflation rate, which excludes volatile food prices, climbed to a new 41-year high of 4.2 per cent in January on the back of rising costs of commodity imports.

Core inflation has exceeded the BoJ’s target for nine straight months, but Ueda suggested the January figure was probably “the peak”, echoing the BoJ’s forecast that price growth would slow this year.

In December, the BoJ surprised investors by announcing it would allow 10-year Japanese government bond yields to fluctuate by 0.5 percentage points above or below its target of zero, widening the previous band of 0.25 percentage points.

It has since protected its target ceiling, but the bonds have come under renewed selling pressure as investors increase their bets that the central bank will abandon the yield cap on 10-year bonds under Ueda.

“The challenge for the BoJ is not to review the monetary easing policy because there are side effects but how it can be creative in effectively maintaining the easing stance,” Shinichi Uchida, a BoJ executive and nominee for deputy governor, told parliament.

Both Ueda and the two deputy governor nominees are expected to be confirmed by parliament in March.

Additional reporting by Eri Sugiura in Tokyo

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