The Bank of Japan should be “creative” with its policy in the face of mounting market pressure to pivot from decades of an ultra-loose monetary stance, its expected next governor Kazuo Ueda said.
Addressing parliament on Friday for the first time since his nomination, the 71-year-old economist said the BoJ would embark on interest rate normalisation if it looked able to achieve and sustain its 2 per cent inflation target.
But in comments that appeared to be intended to avoid disruption to financial markets, Ueda also acknowledged that it would take time for Japan’s rising prices to be sustained, warning that monetary tightening under current conditions could slow down the economy.
“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 Haruhiko Kuroda.
“I believe it is appropriate to continue monetary easing measures while being creative in line with the situation,” he added.
Currency markets moved little following Ueda’s comments on Friday, while Japan’s benchmark Topix was up 0.6 per cent, with trading subdued following a national holiday on Thursday.
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 embark on monetary tightening after two decades of ultra-loose policy. The BoJ is the last major central bank still holding on to negative interest rates, currently at minus 0.1 per cent, and has ploughed massive reserves into Japanese government bonds in order to maintain yields at historically low levels.
Ueda, professor emeritus at the University of Tokyo with a PhD in economics from the Massachusetts Institute of Technology, is neither a dove nor a hawk in monetary policy orientation. Analysts pointed to his voting record on the BoJ board, where he served from 1998 to 2005, which suggests a pragmatic approach to decision-making that draws more on market and economic conditions than ideology.
He is expected to be easily confirmed for the role by MPs.
Ueda spoke after government data on Friday showed 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 imported commodities.
Core inflation has exceeded the BoJ’s target for nine straight months, but Ueda suggested that the January figure was probably “the peak”, predicting that price growth would slow this year, echoing the BoJ’s outlook.
In December, the central bank surprised investors by announcing that 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 maintained its target ceiling, but the bonds have come under renewed selling pressure as investors increase their bets that the BoJ under Ueda will abandon the yield cap on the 10-year bond.
On Wednesday, ahead of Ueda’s appearance, the BoJ conducted emergency bond buying after the yield on 10-year bonds hit the upper limit of their trading band.
Additional reporting by Eri Sugiura in Tokyo