The Bank of Japan should be “creative” in its monetary policy and pursue interest rate normalization if it looks able to maintain its inflation target of 2%, says the next central bank governor, Kazuo Ueda .
Addressing the Japanese Diet on Friday for the first time since his appointment this month, the 71-year-old economist signaled that he was in no rush to change Japan’s ultra-loose monetary policy, explaining that the Future decisions would depend on the outlook for inflation.
In comments that appeared to be aimed at avoiding disruption to financial markets, Ueda acknowledged that it would take time for price growth in Japan to hold 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 strong underlying demand.
“There were various side effects, but in light of the economic and price conditions, the methods were necessary and appropriate to sustainably achieve the 2% inflation target,” Ueda said, referring to the BoJ’s adoption of negative rates and control of the yield curve under outgoing Governor Haruhiko Kuroda.
“I think it is appropriate to continue monetary easing measures while being creative depending on the situation,” Ueda added.
Currency markets were little moved after Ueda’s comments, while Japan’s benchmark Topix rose 0.7% and yields on 10-year Japanese government bonds fell slightly.
Global investors were eagerly awaiting Ueda’s parliamentary hearing after Prime Minister Fumio Kishida broke with precedent by appointing an academic as central bank chief, a role that historically rotated between BoJ officials and the Ministry of Finance.
Many economists expect Ueda to gradually emerge from two decades of quantitative and qualitative easing that has bloated the central bank’s balance sheet with massive purchases of ETFs and Japanese government bonds to maintain yields. down. The BoJ is also the last major central bank to keep interest rates negative, currently at minus 0.1%.
Ueda is known neither as a dove of monetary policy nor as a hawk. Analysts said his comments confirmed the idea that he would take a pragmatic approach to decision-making that was based on market and economic conditions rather than ideology.
Addressing the question of whether the BoJ would move towards normalization or maintain easing measures, Ueda said: “My biggest mission is to make sure that I don’t make a mistake in making the decision in response. to economic developments.
“It was very balanced testimony,” said Masamichi Adachi, chief economist for Japan at UBS. “He clarified that if the price trend does not improve, the BoJ will continue to ease the measures while reducing their side effects.”
Ueda spoke after government data showed on Friday that Japan’s core inflation rate, which excludes food price volatility, hit a new 41-year high of 4.2% in January due to rising raw material import costs.
Core inflation has exceeded the BoJ’s target for nine consecutive months, but Ueda suggested the January figure was likely “the peak”, echoing the BoJ’s forecast that price growth would slow this year.
In December, the BoJ surprised investors by announcing that it would allow yields on Japanese 10-year government bonds to fluctuate 0.5 percentage points above or below its target of zero, widening the range previous 0.25 percentage point.
It has since protected its target cap, but bonds have come under renewed selling pressure as investors increase bets that the central bank will drop the 10-year bond yield cap under Ueda.
“The challenge for the BoJ is not to revisit monetary easing policy because there are side effects, but how it can be creative to effectively maintain the easing stance,” Shinichi Uchida told parliament. , a BoJ executive and candidate for deputy governor.
Ueda and the two candidates for deputy governor are expected to be confirmed by parliament in March.
Additional reporting by Eri Sugiura in Tokyo