As the prime minister of Japan announces his choice to lead the country’s central bank, it is becoming abundantly evident that the position is fraught with difficulty.
Latest government data reveal economic recovery from the pandemic is proceeding much more slowly than anticipated.
In addition, price increases are the most rapid they have been in over forty years.
So what exactly can Professor Kazuo Ueda do to improve the state of the world’s third-largest economy?
Mr. Ueda faces sluggish economic growth and the highest inflation since 1981 if he is confirmed as the next governor of the Bank of Japan (BOJ) by the Japanese parliament.
The Japanese economy grew by 0.6% from the fourth quarter of 2022 to the first quarter of 2023, according to official numbers released on Tuesday. This was far lower than the 2% increase that had been predicted.
Core consumer prices increased by 4% in December from the same time a year ago, which is twice as fast as the rate the central bank had hoped for.
Economic growth in Japan is already quite weak, and many say the next governor of the BOJ will have a difficult time raising interest rates to combat inflation.
The fundamental reason for this is that the health of the economy is not to blame for the rise in prices, but rather external issues like the war in Ukraine.
Moody’s Analytics’ Stefan Angrick told the BBC that tightening monetary policy in response to the bad inflation in Japan could have the opposite effect.
Market participants were caught off guard last week when news spread that Mr. Ueda would be nominated by Japanese Prime Minister Fumio Kishida to succeed Haruhiko Kuroda, who has served in the position for ten years.
Mr. Ueda is a scholar by training, but he is not unfamiliar with the Bank of Japan. Between the years 1998 and 2005, he served on the policy board of the Bank of Japan.
In 1999, he was working for the central bank when it adopted the controversial policy of lowering interest rates to zero.
Mr. Ueda wasn’t on the BOJ’s team when it instituted the controversial policy of capping the interest rates on government bonds, though.
Although the policy of yield curve control (YCC) has little effect on regular consumers, investors have been pushing for its abandonment as they have seen diminishing returns on their investments.
Financial markets were optimistic about Mr. Ueda’s selection last week because he was considered as more inclined to abandon the strategy than other contenders.
While the next governor of the BOJ will undoubtedly confront difficult problems, Mr. Ueda is viewed by some as a pragmatic leader who can adjust to a shifting economic scenario.
Economist Jesper Koll wrote of him, “He is not a guy of dogma, but one of science; a smart and creative thinker who is not afraid to test his idea in the actual world.”
“He is deliberate, he does not shoot from the hip, and he will aim to construct an ideal sustainable policy framework rather than searching for large, immediate successes.”