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BOJ confirmation hearings

BOJ nominee Kazuo Ueda says 'appropriate' to continue easing

Governor nominee signals normalization once stable 2% inflation is in sight

The nominee for Bank of Japan governor, Kazuo Ueda, speaks during a hearing session at the lower house of the Diet in Tokyo on Feb. 24. (Photo by Uichiro Kasai)

TOKYO -- Bank of Japan governor nominee Kazuo Ueda and two would-be deputies testified before a lower house steering committee on Friday -- the first opportunity to hear Ueda's views since news of his selection broke on Feb. 10.

With the market looking for hints about the direction of Japan's monetary policy, Ueda said he believes it is "appropriate" to continue easing, but said he aims to mitigate the side effects. He suggested that a move toward normalization could come once the central bank's 2% inflation target is in sight.

A major question was how Ueda sees the more controversial aspects of the BOJ's approach under outgoing governor Haruhiko Kuroda, such as its yield curve control program and negative interest rates. Ueda, who has a reputation as a non-ideological pragmatist, said he thought Kuroda's policy was "unavoidable."

The prospective governor and two nominated deputies, former Financial Services Agency commissioner Ryozo Himino and current BOJ executive director Shinichi Uchida, will also have to go through confirmation hearings in the Diet's upper chamber. But with Prime Minister Fumio Kishida's ruling coalition controlling both houses, they are expected to be approved by mid-March.

Ueda would then take the reins once Kuroda's term ends April 8.

Here is how the day's proceedings unfolded (Japan time):

3:00 p.m. The Nikkei Stock Average ends the trading day up 1.29%.

2:51 p.m. The session for deputies ends and the committee adjourns.

2:34 p.m. Himino on what he wants to achieve in his five-year term: "I have been finding that Japan's relative position has been declining ever since I became a civil servant, and I would like to do my utmost to see the situation reversed in five years."

He adds, however, that this is "not something that only the Bank of Japan can do."

2:08 p.m. Himino discusses how the BOJ can lead international rule-making during Japan's year as the Group of Seven chair.

"I have been engaging in international relations for a long time, and I am familiar with either the governor or the deputy governor of the central banks of the G-7 countries. As for rule-making, I believe that we are now in an environment where we must be active in setting agendas, making proposals, and even communicating these proposals to international public opinion. If I am approved, I will do my utmost."

1:40 p.m. Uchida talks about outside perceptions of the BOJ board's meetings. "I hope that we can have discussions without worrying about the end time of the policy decision meeting," he says. "If the meeting ends too late, the market may speculate that it is a policy change." He hopes to establish that it is also important to "discuss the status quo."

1:31 p.m. Uchida says it is "too early to discuss specifics" of how to end monetary easing.

He stresses: "As someone who has been involved in designing the current framework from a practical standpoint, I have naturally been thinking about the possibility of exit from the very beginning of its introduction." But he says, whatever the conditions may be at the time of exit, "we will be able to respond appropriately."

1:05 p.m. It's Uchida's turn to speak. He, too, talks about continuing monetary easing, calling it "necessary."

"We believe that the challenge facing the BOJ is not to review the easing because of side effects, but rather to devise ways to continue monetary easing in an effective manner," Uchida says.

He also talks about the need for a nimble central bank.

"It is also important to respond flexibly to changes in the economy and society, such as digitization, and to provide central bank services that are highly convenient for the public." Uchida points to the prospect of a central bank digital currency (CBDC), which he says should be decided after a "national discussion." But he says, "We will continue to conduct demonstration tests and discussions with relevant parties as a prerequisite for such a system."

1:00 p.m. The afternoon session begins. The deputy candidates, Shinichi Uchida and Ryozo Himino, are due to explain their positions.

12:17 p.m. Ueda's lower house hearing wraps up.

12:15 p.m. As the session winds down, Ueda fields a question on where he feels prices have jumped in his own life.

"I work at a university, so I have a lunch bento from a convenience store every day," he says. "Over the past year or so, I have noticed that the price of a boxed lunch, which used to cost around 450 yen ($3.35), has risen to over 500 yen."

"The most significant factor" behind the yen's depreciation "was the move to raise interest rates in the U.S. in order to suppress the inflation rate"

Kazuo Ueda

12:04 p.m. The subject of the yen's depreciation and the connection with BOJ policy comes up.

Ueda answers, "I believe that we cannot deny the possibility that the recent depreciation of the yen was influenced by the difference between domestic and foreign interest rates. The most significant factor, however, was the move to raise interest rates in the U.S. in order to suppress the inflation rate."

11:45 a.m. Ueda is asked to spell out what he intends to accomplish in his five-year term.

"Although the underlying inflation rate has begun to rise, we are not sure whether it will reach 2% or not. If it does reach a phase of 2%, I believe that it is my responsibility to ensure that normalization is carried out at the right time," he says.

"If it is difficult to reach 2%, then we will take preliminary steps -- that is, we will take steps to continue some form of monetary easing while mitigating side effects. I believe that it is my greatest mission to make sure that such decisions are not made incorrectly."

11:42 a.m. Asked about his expectations for the deputy candidates, Ueda says he has "had the opportunity to work with both of them on various occasions in the past, to attend meetings together, and to exchange opinions."

Based on that, he says, "I believe that they are two very encouraging candidates for the deputies."

11:35 a.m. On the outlook for normalization, Ueda says: "If the BOJ is to exit from the various monetary easing policies it currently adopts, it will have to normalize each of them. However, how and when to proceed with the normalization of each of these policies, and which will be implemented first, will depend on the future development of the economic situation."

11:21 a.m. Ueda says Kuroda's 10 years of ultraloose policy was "unavoidable."

"Given the 2% target, it is the BOJ's responsibility to achieve it through monetary easing. I believe that the BOJ initially started quantitative and qualitative easing with the expectation that it would be able to reach 2% in a short period of time by strengthening monetary easing through various measures, including large-scale purchases of long-term Japanese government bonds, which had not been done very often before. However, it has taken a long time due to various external shocks," Ueda explains.

"Under such circumstances, I think the decision to continue monetary easing in various forms and with various additional elements was unavoidable."

"It is inevitable that there will be surprises from time to time. However, even in such cases, I think it is possible to minimize such surprises by explaining our thinking in a simple and plain manner"

Kazuo Ueda

11:13 a.m. Ueda is asked how he intends to communicate with the market, with Komeito lawmaker Mitsunari Okamoto referring to Kuroda's penchant for surprise decisions.

"Policy management is a process of changing the future outlook based on new information that comes in during the course of each policy meeting, and in some cases changing policy accordingly," Ueda replies. "It is inevitable that there will be surprises from time to time. However, even in such cases, I think it is possible to minimize such surprises by explaining our thinking in a simple and plain manner."

10:54 a.m. The yen moves nervously at around 134 to the dollar. The Japanese currency temporarily weakened against the greenback to around the upper 134 level after Ueda signaled his intention to "continue monetary easing," before being pulled back.

10:47 a.m. Asked what indicator he will watch for prices, Ueda replies: "There is no ideal indicator that can perfectly determine the underlying trend." He says a variety of factors need to be watched, "including wages."

10:35 a.m. The nominee says determining how to deal with the large amount of exchange-traded funds (in other words, equities) held by the BOJ is going to be a major issue. He says it will have to be looked at more closely once the bank nears an exit from easing.

10:25 a.m. Ueda refrains from giving specifics on the future of yield curve control -- the policy whereby Kuroda's BOJ pegged the 10-year bond yield at a specified range around zero and short-term yields at -0.1%, while other yields, such as the 20-year, were allowed to rise freely so that institutional investors like pension funds and insurers can earn returns and pay benefits to pensioners.

"There are various possibilities for the future of yield curve control," Ueda says. "However, at this point in time, when I am being nominated as a candidate ... there is a risk of unforeseen effects if I were to discuss the pros and cons of specific options, so I would like to refrain from giving an answer."

But he adds: "If the outlook for underlying prices continues to improve, I believe that we will have no choice but to review the yield curve control, or at least to review it in the direction of normalization."

10:20 a.m. The Nikkei Stock Average has started to gain momentum, rising over 1% following Ueda's comments that he believes continuing monetary easing is appropriate.

10:15 a.m. Asked why the 2% target is needed, Ueda says: "This may be a bit harsh to put it this way, but I believe that this is a global standard inflation target."

"When we are a little closer to 2%, and when we can foresee the realization of 2%, we will be able to take steps toward the normalization of monetary policy"

Kazuo Ueda

10:07 a.m. Ueda says that while he expects prices to keep rising, the inflation rate that came out earlier today will be the "peak for the time being."

As noted earlier, Japan's core consumer price index -- which excludes fresh foods -- rose 4.2% on the year in January.

"I believe that the next release of data will show a considerably large drop in the inflation rate," he says.

Ueda says it will take some time to achieve the 2% target. But he adds, "When we are a little closer to 2%, and when we can foresee the realization of 2%, we will be able to take steps toward the normalization of monetary policy."

9:55 a.m. Asked how he will engage with central banks and market participants in other countries, Ueda says that cooperation with foreign central banks is "becoming increasingly important." He also says that it is "important to communicate with the market."

He mentions connections he built at international conferences, including as a member of the BOJ policy board and later as an academic in Japan and abroad. "I would like to make use of this network of contacts and knowledge I have developed in order to cooperate with foreign central banks and communicate with market participants in an appropriate manner," he says.

9:50 a.m. As a leader, Ueda says, he is determined to lead the BOJ's roughly 5,000 officers and employees by setting the right example. "The mindset of the top management of an organization is to clearly define its goals, and to show that they themselves are taking the initiative in striving toward those goals," he says.

Earlier, while nodding to the important and long-established principle of central bank independence, he vowed to implement appropriate policies "through close collaboration with the government, and with support from government initiatives." This way, he said, he hopes the bank can achieve stable and sustainable inflation.

"I believe that it is appropriate for the Bank of Japan to continue monetary easing, while continuing to devise ways to respond to the current situation"

Kazuo Ueda

9:45 a.m. Ueda concedes that "various side effects have been observed" as a result of extraordinary monetary easing, but says that in view of the 2% inflation target, it was "an appropriate step and I think it is appropriate to maintain the easing policy."

He says, "I believe that it is appropriate for the Bank of Japan to continue monetary easing, while continuing to devise ways to respond to the current situation."

He concludes his statement by saying, "I would like to make the next five years the time for the Bank of Japan to complete its mission of achieving price stability, which has been a longstanding issue for both the bank and myself over the 25 years since the new Bank of Japan Law came into effect."

9:32 a.m. Ueda starts his statement: "Although our country is currently recovering from the coronavirus disaster, there is still a great deal of uncertainty surrounding the long economy and financial markets. The rate of increase in consumer prices is around 4%, higher than the 2% target. However, the main reason for this is cost push due to rising import prices, not due to strong demand."

He continues, "I believe that it will take more time to achieve the 2% target in a sustainable and stable manner. In light of the current economic and price situation and the outlook for the future, we believe that the bank's current monetary policy is appropriate."

9:32 a.m. Here we go. Ueda is in the Diet and the hearing is getting underway.

9:00 a.m. The Nikkei Stock Average opens at 27,144, up 0.15% and almost unchanged from the previous trading day as investors await Ueda's hearing. The yen trades at around 134.57 against the dollar, strengthening slightly from the last trading day.

8:35 a.m. Japan's core consumer price index -- which excludes fresh foods -- rose 4.2% on the year in January, surpassing the BOJ's price stability target of 2% for the 10th consecutive month, according to official data that just came out. The latest figure is up from 4% in December and the highest in over 41 years.

Inflation and the outlook for prices will be a major topic during today's proceedings.

8:30 a.m. One hour to go before Ueda is scheduled to appear for his lower house hearing.

He is widely expected to chart a new course after 10 years of unconventional monetary policy under Kuroda, which saw the central bank buy Japanese government bonds without a limit, acquire domestic equities in large volumes, and guide 10-year interest rates to zero and short-term rates to minus 0.1%.

This bold easing was a pillar of the Abenomics economic revitalization program under late Prime Minister Shinzo Abe. It helped triple share prices, but its side effects also became increasingly evident, as debt mounted while the yen tumbled to a 32-year low against the dollar in October.

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