MNI POLICY: Ueda's YCC Concerns Hint At BOJ Policy Shift

Bank of Japan governor-elect Kazuo Ueda, who is set to take office on April 9, will likely keep interest rates at low levels but may quicken the scrapping of yield curve control to restore functioning in financial markets, MNI understands.

Japan's government on Tuesday officially nominated Kazuo Ueda, an economist and former Bank of Japan board member, as the BOJ’s next governor to replace Haruhiko Kuroda, whose term ends on April 8, a Diet official said.

Ueda previously said the BOJ needs to seriously consider reviewing its unprecedented easy policy at some point. A short-term focus for market participants will be on how Ueda analyses the current rise in the Consumer Price Index and assesses the outlook for Japan’s economy and inflation, especially at a time when growth in overseas economies is slowing under the weight of rate hikes. (See MNI POLICY: Ueda Supports BOJ's Easy Policy, Could Tweak YCC)

The 71-year old has argued the BOJ needs to keep interest rates at low levels given his concerns about the costs stemming from premature rate hikes. However, Ueda may seek to tweak the BOJ's yield curve control policy or even scrap it at an early stage as he has highlighted challenges facing the BOJ in fine-tuning the 10-year bond yield target.

He has acknowledged the difficulty in gradually adjusting the long-term interest rate because market participants will position for the next widening in the YCC band, which would invite a sell-off in bonds and push yields higher. Shortening the long-term target to seven or five years also poses a similar problem, Ueda has said. Ueda could consider leaving the determination of the 10-year bond yield to markets.

He said late Friday that the BOJ’s current policy is appropriate and the bank needs to maintain easy policy. (See MNI INTERVIEW: Flexible CPI Horizon Key To YCC Tweaks - Yamamoto)

ENHANCED COMMUNICATION

Ueda may consider measures that enchance communication with financial markets, possibly providing a policy rate outlook similar to the Federal Reserve’s dot plot.

BOJ officials have shunned away from telegraphing a future policy rate outlook on concerns market participants may view the estimates as a prediction, which would undermine monetary policy flexibility.

Ueda has previously expressed support for easy policy and opposed lifting rates from zero percent in 2000 under then-governor Masaru Hayami. Ueda became the BOJ policy board’s youngest member in April 1998, and was later reappointed before serving until April 2005.

He was well known at the time for arguing in favour of forward guidance for the policy rate before it was introduced in 2000, with a pledge to hold at zero until fears of deflation had dissipated.

In 2022, Ueda said raising interest rates to cope with a temporary rise in the CPI would have an adverse impact on the economy and inflation rate, which would impede the goal of lifting rates over the medium to long term.

Ueda cautioned that if the BOJ embraced policy normalisation based on a small rise in the CPI it would be viewed as breaking a promise to deliver its 2% target in a stable and sustainable manner. Additionally, the bank's credibility could be at risk from any move away from easy policy that threatened growth underpinned by the decade-long policy of low rates. (See MNI POLICY: New BOJ Gov Must Keep Rates Low, Ensure Recovery)