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(Bloomberg) — When Kazuo Ueda emerged as a front-runner to become the next Bank of Japan governor early last year, former Treasury Secretary Larry Summers described the septuagenarian academic as Asia’s version of Ben Bernanke.
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Summers said the two, who both studied at the Massachusetts Institute of Technology, share a soft-spoken academic atmosphere but are “determined.”
That resolve was on display Tuesday, when Mr. Ueda raised borrowing costs for the first time since 2007, ending the era of negative interest rates and dismantling his predecessor’s yield curve control program in the process.
When Mr. Ueda, now 72, was sworn in as the first academic in the institution’s long 141-year history in April, this was something most market players said was unlikely to be achieved so soon. This is a move I had been thinking about.
But Ueda has adjusted policy or forward guidance four times in eight policy meetings as BOJ governor, making Tuesday’s changes the most significant yet. It’s a performance that suggests investors should brace for further changes as Japan seeks to emerge from more than a decade of deflation and return to monetary policy orthodoxy.
“The monetary policy framework that Governor Ueda is aiming for is a very traditional one that combines ultra-low interest rates and forward guidance,” said Hideo Hayakawa, a former Bank of Japan managing director who has known the governor for more than 40 years. .
Chairman Bernanke began lowering U.S. interest rates early in his tenure and led the Fed into a massive quantitative easing campaign in response to the 2007-2008 financial crisis. Less than a year into his tenure as governor, Ueda faces the opposite challenge of freeing Japan from the world’s most audacious financial experiment.
Mr. Ueda’s efforts so far are as follows.
As soon as his nomination was announced in February 2023, Ueda communicated clearly and signaled his intention to act methodically. This was seen as a departure from his predecessor, Haruhiko Kuroda, who gained a reputation for surprising markets with “shock and awe” policy developments.
Mr. Ueda started his term on a dovish note, sticking to Mr. Kuroda’s scenario of a firm easing stance and urging economists to lower their expectations for tightening. He also sought to lower his expectations, in contrast to the bold debuts of his predecessors.
“My mission is not to come up with some kind of magical special monetary policy,” Ueda said at a parliamentary hearing to confirm his nomination. In contrast, Governor Kuroda began his term as governor by declaring a goal of achieving the 2% inflation target in just a few years.
At his first policy meeting as governor in April, Ueda pulled off his first surprise by abandoning his obvious bias toward monetary easing. At the time, the country’s main inflation indicator was hovering around 3%, well above the Bank of Japan’s 2% target.
Mr. Ueda then tweaked the yield curve control program in July by widening the range of 10-year bond yields, catching the market by surprise. But even after that move, nearly two-thirds of BOJ watchers viewed Mr. Ueda’s communications favorably. At that time, only 4% of respondents expected negative interest rates to end by March of this year.
At the October meeting, Ueda gave himself a more flexible framework in a move that essentially turned the YCC framework into an insurance policy against a spike in bond yields, rather than an actual target range.
The tweaks to the framework helped ensure that when the YCC is finally lifted this week, it does not trigger the kind of messy capitulation seen when the Reserve Bank of Australia withdrew from its own policy.
At the December meeting, Ueda downplayed the possibility of an immediate rate hike, saying he wanted more evidence that the price stability goal could be met. In January, the Bank of Japan’s quarterly report said for the first time under his watch that the BOJ’s certainty of achieving its outlook continued to grow.
Ahead of Tuesday’s meeting, Ueda reiterated the importance of spring wage negotiations. So when the nation’s largest labor group announced late Friday the results of the first round of annual wage negotiations that were much better than expected, bets were quickly put into action.
Now that negative interest rates are in Japan’s rearview mirror, attention quickly turns to when the next rate hike will occur and what Mr. Ueda will do with the assets accumulated by his predecessors.
“So far, Mr. Ueda has fared better than Bernanke without triggering what amounts to a taper tantrum,” said Hiroshi Miyazaki, senior economist at Mizuho Research & Technologies. “Still, he’s not done yet. He has a lot of work ahead of him.”
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