Bank of Japan Governor Ueda and Finance Minister Suzuki hold a press conference after the G7 Finance Ministers and Central Bank Governors Meeting, April 12, in Washington. (© Kyodo)
The new management of the Bank of Japan (BOJ) commenced under the leadership of Governor Kazuo Ueda, who took office on April 9.
At a press conference, Ueda reiterated the BOJ's intention to maintain its ultra-loose monetary policy. To that end, he indicated that it was "appropriate to continue" the bank's negative interest rate policy and its manipulation of long-term and short-term interest rates.
In other words, the bank will adhere to the general framework of its current policy while addressing the side effects of monetary easing, such as the deterioration of market functions.
For the time being, this is realistic policy management since the Japanese economy is not yet strong enough to shift to a tight monetary policy.
Eventual Exit Strategy
However, there will eventually come a time when an "exit strategy" will be required to normalize monetary policy. Managing this exit strategy will be a critical mission for the new management.
The BOJ must conduct a comprehensive assessment of price and wage trends while engaging in market and political dialogue. Based on this, the BOJ should act decisively to implement necessary policies without missing any windows of opportunity.
So far, the goal of former Governor Haruhiko Kuroda's team to achieve a sustained, stable inflation rate of 2% accompanied by wage increases has not been achieved.
Ueda stated, "I would like to make every effort — in theory and in practice — to pursue the comprehensive mission of achieving price stability."
To achieve price stability, the BOJ must have an accurate grasp of the positive and negative effects of the current monetary policy. As Ueda stated, there is a need to "examine and verify" these effects, and the bank must act swiftly.
Flexibility and Adaptability
Additionally, the bank should take all necessary steps to respond to economic and financial changes in Japan and around the world. For example, the Bank of Japan's large-scale purchase of government bonds for monetary easing distorted market interest rate formation. It also had side effects like the weak yen and loose fiscal discipline.
The BOJ must be able to respond flexibly by reflecting changes in its monetary policies. For example, could bank failures in the United States and Europe exacerbate financial system instability? Also, will the movement for higher wages, as seen at the shunto spring wage talks, continue to spread?
Transparency and Clarity
Furthermore, the BOJ should remember to disseminate information in a way that is easy to understand. Former Governor Kuroda often made surprise policy changes. A typical example is the bank's abrupt raising of the long-term interest rate cap in December 2022.
Surprises often cause major market turmoil. Therefore, the bank should be careful to avoid spreading doubt and fear, especially when under scrutiny as it decides whether to transition to monetary tightening.
Clarifying the direction of its monetary policy and increasing predictability will help boost confidence in the BOJ's decisions.
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(Read the editorial in Japanese.)
Author: Editorial Board, The Sankei Shimbun
