Japan’s Kazuo Ueda can be excused for regretting saying “I do” 15 months ago.
Accepting the most sensible task at the Bank of Japan seemed smart at the time. What economist trained at the Massachusetts Institute of Technology would turn down the possibility of becoming a governor of a Group of Seven financial authority?
Ueda might have wanted to have done so as he struggles to accomplish the ultimate task in the global economy.
Almost everything Ueda’s team knew about 2024 went wrong. China is suffering from the deflation of the strong rebound that investors were expecting. The odds of a rate cut through the Federal Reserve are diminishing, prolonging the era of “higher and longer” yields. . Germany, Europe’s economic engine, is stagnating.
Meanwhile, Japan’s situation remains a mystery as the yen disappears in real time. A few months ago, the resolution was simple for Ueda’s team: start raising interest rates, which have remained around 0 since 1999. Twelve months ago, Japanese inflation reached its highest point in 40 years. Markets were poised for a BoJ turnaround.
Ueda’s team ruined everything. The Bank of Japan left rates at 0 and stuck to a quantitative easing program first initiated in 2001. By the end of 2023, the economy avoided recession. This year, it is expected to grow by just 0. 5%, according to the Organization for Economic Cooperation and Development.
At the same time, inflation is now well below 3%, on track for the Bank of Japan’s 2% target. This slow dynamic of expansion and disinflation will be difficult to reconcile with Japanese rates in the coming months.
BOJ observers, who believed Ueda would act boldly in April, have since turned their attention to June. Many, however, foresee a slight adjustment in October at the earliest.
If Ueda had acted in October or earlier to start normalizing its rate policy. Ueda’s life would be much less difficult if he had raised the Bank of Japan’s benchmark index to 0. 1% as soon as he took the helm in March 2024. The same applies to the implementation of a plan and timeline for the phasing out of QE.
It would have been even greater if Ueda’s predecessor, Haruhiko Kuroda, had begun to clean up the mess Tokyo caused during his 10 years in office. Upon his arrival at the Bank of Japan’s headquarters in April 2013, Kuroda spearheaded the institution’s 12-year quantitative easing program.
Kuroda embarked on an asset-buying frenzy that replaced the mechanics of fashionable central banking. Its force-feeding of bonds and stocks has exploded the Bank of Japan’s balance sheet, which in 2018 outperformed the entire Japanese economy by $4. 7 trillion.
Still, the Bank of Japan has failed to scale up an exit strategy. It simply continued to buy assets with abandonment, year after year. Even as its titanic share of the government bond market has halted all trading activity, the Bank of Japan has bought more.
Despite the “moral hazard” side effects stemming from the fact that the G7 central bank is the largest owner of Tokyo stocks, officials have continued to buy. And Kuroda’s BOJ did indeed find itself trapped. In many ways, this is still the case.
How can the Bank of Japan withdraw trillions of dollars from bonds and stocks without causing a mini-panic in global markets?However wise and competent Kuroda was, he had to blame his successor.
You communicate about a position in which one can live. Exiting inventories too temporarily through the publicly traded budget and Ueda may be remembered for ending the rally in Japan’s most productive inventory market position in decades. If bond holdings are reduced too temporarily, Japanese bond yields may simply rise. a way Tokyo hasn’t noticed in decades.
Complicating Ueda’s thinking procedure is the largest debt burden in the evolved world. But it’s not just that Tokyo’s debt-to-gross domestic product ratio is 260%. It’s also that the country’s population is aging as fast as it’s shrinking.
Every 25 fundamental issues that the Bank of Japan adds to short-term rates will have strong policy consequences, as 10-year emerging market bond yields will increase domestic debt service prices. Don’t ask ourselves whether Japan Inc. is in a position to live without financial steroids as foreign economists believe.
Take, for example, fears about the fragility of the regional banking system. More than 100 medium-sized for-profit lenders are scattered across the country in second- and third-tier cities, serving aging and declining local economies.
Over the past decade, the government has tried to consolidate the industry, but without success. With less and less activity, many regional banks have to invest heavily in longer-term government bonds. This practice will be familiar to Silicon Valley academics. Banking explosion at the beginning of 2023.
Ueda also has a challenge with the yen. If the financial brakes are also put on the brakes, the exchange rate soars, hurting global markets. Twenty-five years of zero interest rates have made Japan the world’s leading creditor. profitable assets, from New York to São Paulo, Mumbai and Shanghai.
It’s hard not to think of the Bank of Japan as the financial policy equivalent of the dog that jammed the proverbial car. The inflation it has been generating for decades, regardless, is here. And yet, the Bank of Japan isn’t sure what to do. do.
Ueda will have the luxury of entrusting those decisions to his successor. Important and potentially disruptive decisions need to be made now. The faster, the better, in the interest of Asia’s second-largest economy.