On Monday, Ueda said there are plans for how the downscaling of the central bank’s massive stimulus programs can take place. However, he reiterated that a transition to contractionary monetary policy will only happen after trend inflation rises, according to Bloomberg.
Active buyer
However, the high inflation does not put any immediate pressure on the BoJ to tighten monetary policy by raising interest rates and halting purchases of government bonds. In December, the BoJ extended the interest rate interval for the ten-year government bond from plus/minus 0.25 percentage points to plus/minus 0.50 percentage points around 0 per cent. With a looser interest rate band, the BoJ would not need to buy as many bonds to push interest rates down, one would think.
It was current central bank governor Haruhiko Kuroda who introduced the interest rate band.
The market seemed to quickly lose faith that the BoJ would pursue a tightening monetary policy for a long time, and the interest rate on the ten-year note immediately began to flirt with the upper part of the interest rate band. Then in mid-January the BoJ had to step in and bought bonds for over 2 trillion yen. By comparison, before the interest rate band was widened in December, the central bank traded ten-year government bonds for bare 1.3 trillion yen.
The legacy of Kuroda
After parliament approves Ueda as Kuroda’s successor, his 5-year term will begin on April 8. He must be approved by both houses of parliament, but no problems are expected, as Prime Minister Fumio Kishida’s Liberal Democrats have a majority in both.
RESIGNS: On April 8, current BoJ chief Haruhiko Kuroda will step down. Foto: Bloomberg
Among other things, Kuroda is leaving behind the gigantic securities purchases and the interest rate band policy. Ueda has praised Kuroda and his monetary policy for reintroducing inflation in a country that has struggled with deflation. At the same time, Ueda is clear that large monetary policy stimulus packages are not enough to accelerate inflation on their own. Especially not when the economy is hit by external shocks.
The central bank must also be careful not to contribute to inflation that is too high, according to Ueda, by continuing to print money until trend inflation exceeds the two percent target. It may be a hint that monetary policy will be tightened sooner rather than later.
“Monetary policy can push up inflation, but it is not the only factor affecting prices,” Ueda said at Monday’s hearing.
