[Column] Ending Abenomics

Can Ueda cut the Gordian knot? He looks fit for the job as BOJ governor.

Lee Sang-ryeolThe author is an editorial writer at the JoongAng Ilbo.

A new commander has been appointed to spearhead the monetary policy of the world’s third largest economy. Kazuo Ueda, a 71-year-old honorary professor at the University of Tokyo, is expected to succeed current Bank of Japan (BOJ) Governor Haruhiko Kuroda, whose decade-long term ends on April 8, when the nomination is passed by the parliament. The market and economists are interested mostly in one thing from the exit of Kuroda: whether Japan will join its global peers by abandoning the long-held ultra-loose monetary policy.

Kuroda came into office in March 2013 as the executor of Prime Minister Shinzo Abe’s radical stimulus program, Abenomics. Under his reign, the BOJ steadfastly kept the policy rate negative and aggressively pushed ahead with the quantitative easing through massive bond purchases to back fiscal stimuli. He was faithful to Abe’s vow to run the money printer nonstop until his sudden death in July 2022. The unprecedented ultra-loose policy of a lengthy streak of minus rates and yield curve control (YCC) became the signature of the outgoing chief of the central bank.

Abenomics originally was designed with three-pronged objectives of stimulating the economy through expansionary fiscal policy, regulatory reforms and unlimited quantitative easing. The two arrows of fiscal stimuli and regulatory reform was broken shortly after Abe’s exist, leaving only the monetary easing to Kuroda. The last arrow became the last surviving component of Abenomics. Abenomics certainly helped to end Japan’s chronic deflationary cycle, but not completely. The boundless monetary easing rather helped distort the market. So, Abenomics delivered both positive and negative returns — with consequences spilling over to the global economy. The so-called yen carry trade — investors borrowing the yen at a low-interest rate and purchasing dollars or other currencies for high-interest rates on their bonds — spread across the globe. The BOJ’s quantitative — and qualitative — easing policy became a research model by many central banks struggling with the Covid-19 pandemic woes.

Most think the BOJ won’t suddenly veer away from the monetary easing, given political conditions in Japan. As Prime Minister Fumio Kishida remains strained by the majority Abe faction in the Liberal Democratic Party (LDP), he cannot easily depart with Abenomics. And yet, Kishida wishes to keep his distance from Abe’s legacy as Abenomics “failed to have a ripple effect” the Japanese government hoped for 30 years.

Shortly after his nomination as head of the BOJ, Ueda defined the monetary policy as “being appropriate” for the country’s economic conditions. The former monetary policy board member believes the central bank’s monetary policy should be based on current conditions, future economy and price projections. “Under the current condition, monetary easing must continue,” he said. But that was a calculated comment so as not to upset the market.

Still, just like Kishida is not a copycat of Abe, Ueda is also different from his predecessor. In an opinion piece he contributed to the Nikkei last July, Ueda warned against a “premature rate hike,” but nevertheless advised the BOJ to “seriously examine the unprecedented monetary policy” and “devise an exit strategy.” In the end, Ueda will pursue the “normalization” of all the abnormalities.

A constraint on the exit strategy is its ramifications on the Japanese economy and the BOJ balance sheet. The central bank has been feeding cheap money to the market through the unlimited purchase of government bonds. As a result, the BOJ holds more than half of Japan’s national bonds. The country’s outstanding debt accounted for a whopping 263.9 percent of its GDP. The debt load against GDP is unmatched among OECD member countries.

When interest rates go up after the quantitative easing ends, the government’s debt financing cost will shoot up and can trigger a speculative sell-off in national bonds. That could fan a further rise in market yields and adversely affect consumption and investment. A return to the deflationary slump is the last thing the Japanese want to see.

And yet, the central bank can hardly hold on to the ultra-loose policy. Side effects are bulging as Japan solely keeps to zero rate while other central banks are raising their rates to fight inflation from bubbles of their pandemic liquidity. Above all, the weak yen has made imports costlier and fueled inflationary pressure. The consumer price index, excluding fresh food, rose 4.0 percent in December on year, the most in 41 years. The Abenomics mission of lifting the inflation rate to 2 percent was more than achieved, but reality shows otherwise.

Today’s inflation in Japan resulted more from the weak yen than from increased consumption and investment as hoped by Abenomics. The capital flight capitalizing on the interest rate difference is feeding “bad” inflation. The inflationary run did not help raise wages either, as hoped by Kuroda. Instead, real wages fell for the eight consecutive months. The Keidanren, the Japan Business Federation, has been encouraging employers to raise wages, but to little avail. The BOJ’s cap on yields through its dominant command over government bonds also fueling market distortion.

Can Ueda cut the Gordian knot? Based on credentials, he looks fit for the job as BOJ governor. He was on the monetary board from 1998 to 2005 when the BOJ adopted zero interest rates and bond-purchase program. As Ueda also serves as a senior adviser to the Institute for Monetary and Economic Studies (IMES), a BOJ think tank, he is well versed in monetary policy and its conundrums.

At the Massachusetts Institute of Technology (MIT), Ueda was a pupil to Stanley Fischer, a renowned professor of economics, who served as head of the Israeli central bank and vice chair of the Federal Reserve. His students include former Fed Chair Ben Bernanke, former European Central Bank President Mario Draghi, and former Treasury Secretary Laurence Summers.

From left to right: Fumio Kishida, prime minister of Japan; Kazuo Ueda, nominee for the next governor of the Bank of Japan; Haruhiko Kuroda, current governor of BOJ; Shinzo Abe, former prime minister of Japan.

Ueda finished his doctoral thesis under the guidance of Prof. Fisher during the similar times of Bernanke, who earned the sobriquet “Helicopter Ben” for his argument on the U.S. money-printing power to save the U.S. economy from the financial crisis, and “Super” Mario Draghi who safely navigated the euro zone out of crisis through his aggressive monetary policy. Appearing on Bloomberg TV, Summers called Ueda as “Japan’s Ben Bernanke.” Ueda’s connection with global central bankers could help raise international confidence in BOJ’s currency policy.

Market experts predict that the contentious YCC, or the cap on yields, could be the first target for normalization under Ueda. The BOJ allows the 10-year government bond yield to only move by 0.5 percentage points while fixing it at zero. The cap feeds excess BOJ ownership of government bonds, helping worsen fiscal condition and weakening market function. The central bank’s excessive control over long-term yields widened the gap with U.S. treasury bond yields to trigger a further weakening of the yen. Summers warned against the limitless control of market yields as it cannot be sustained. The International Monetary Fund (IMF) also advised the BOJ to demonstrate more flexibility. How Ueda will set the direction of his operation on YCC is a key issue, as any radical step can cause shockwaves.

Jung Sung-chun, vice president of the Korea Institute for International Economic Policy, predicts that the BOJ will carry out an incremental and prudent easing of the YCC after weighing its effects and side effects and consider a hike in short-term rate after next year.

Kuroda’s exit and Ueda’s succession will mean a de facto end to Abenomics. But not right now. The central bank’s quantitative easing will continue for a while without a dramatic change.

Sung Tae-yoon, an economics professor at Yonsei University, assessed that the normalization of the Japanese financial market will work positively for the Korean economy in the longer run. “For now, there is little possibility of an abrupt withdrawal from the yen carry funds.”