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(Bloomberg Opinion) -- Almost from the moment he was sworn in as Bank of Japan governor, Kazuo Ueda sounded like a guy who wanted to be done with negativity. It just wasn’t obvious why. As the BOJ this week considers a third tightening, his argument for raising interest rates has become clear — in case they need to be cut later. It has a certain circularity to it. But now the bank is forging further into positive territory, the path ahead is much trickier, and the potential for a mistake far greater.
One of his first acts as governor in 2023 was to commission a report into the successes and shortcomings of the institution’s response to the so-called lost decades. This period lasted from roughly the last years of the 20th century through to Ueda’s ascent. His distaste for negative borrowing costs, a radical step undertaken by his predecessor Haruhiko Kuroda, is clear in the document’s findings that were released in late December. Rates below zero may have made sense in an era when deflation was public enemy number one, but the sooner they were consigned to the history books, the better.
Aside from the brighter inflation outlook today, when consumer prices are rising close to the 2% target, the inquiry found another reason to express the bank’s antipathy. With rates super-low, there’s less room to juice the economy when the next recession occurs — as it surely will at some point — without resorting again to “unconventional” tactics. “It is desirable to conduct monetary policy so that the zero lower bound would not be reached,” said the report, which attracted little attention when it was published. “From this perspective, it is important to maintain a moderate positive inflation rate in a stable manner so that real interest rates can be lowered in the case of an economic downturn.”
Ueda laid the ground carefully, and was wary of any market convulsions that might arise from a sudden shift, but there was little mistaking the determination. In March last year, he ended the regime — but only by a bit. The main rate went from minus 0.1 to about zero. He went a step further, and hiked to 0.25% in July. The latter move was more ham-fisted: only a minority of economists forecast the move and the shock is widely seen as contributing to a stock-market meltdown the next day.
It’s good to finally have what amounts to a Ueda doctrine. The former professor has previously struggled to express his rationale for lifting rates. That might be because in economic terms, there isn’t much of one. Not only is the economy not overheating, it likely shrank in 2024, and is forecast to grow about as much as the UK’s this year. Contrary to the BOJ’s positive lines on private consumption and wage hikes, household spending has declined almost every month for the past two years.
Ueda has further tied his hands with his about-face on the yen: His initial dismissal of its lasting impact on inflation only encouraged further speculative weakening of the currency, forcing him to take a stronger line. Now, instead of BOJ action leading to a strengthening yen as once hoped, every step taken only seems to work in the other direction.
Based on this report, however, we can expect that when Ueda does act, he’ll shoot first and answer questions later, whether it makes sense or not. (Remember his justification about the need for “preemptive” action for last July’s hike?) His deputy, Ryozo Himino, provided little clarity with his unusually timed speech last week, an event that some took as signaling a tightening, using Monday’s inauguration of President-elect Donald Trump as cover. The next day, Ueda himself hinted at a possible move.
We have some sympathy for the BOJ’s dilemma. The aftermath of unwinding huge stimulus is always difficult. Usually, the economy isn’t screaming out for a series of hikes. The Federal Reserve confronted a similar situation in the mid-2010s after wrapping up years of quantitative easing that dated to the darkest days of the Global Financial Crisis. The famous dot-plots projected four hikes of a quarter-point in both 2015 and 2016. The Federal Open Market Committee managed just two increases, in December of each year. One of the arguments advanced for getting moving was similar to the BOJ’s. You have something to play with if conditions go south. In the end, the Fed proceeded on the basis of projections — the labor market was strengthening, which would surely generate inflation. It failed to really take off; then Fed boss Janet Yellen called it a mystery. It would take the pandemic for prices to climb in any pronounced way.
Ueda’s work may not be complete, but he recognized his initial priority and stuck to it. That Japan’s economy hasn’t suffered too much damage is either luck or a natural result of the governor’s caution. The review won’t be the first autopsy on the Kuroda era and its aftermath, but it’s a good start.
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This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was executive editor for economics at Bloomberg News.
Gearoid Reidy is a Bloomberg Opinion columnist covering Japan and the Koreas. He previously led the breaking news team in North Asia, and was the Tokyo deputy bureau chief.
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