Ueda’s appointment brought hopes for a bit more consistency, yet the new governor has deployed his share of sudden revelations. — Bloomberg
SURPRISES are fine in central banking provided they don’t land too frequently – and are of the right kind, preferably dovish.
The tricky part about the Bank of Japan (BoJ) is that the bombshells come often and have not been of the favourable variety.
The first interpretation, usually negative, wins. Japan itself has trained markets to behave this way.
The latest revelation came on the weekend, when governor Kazuo Ueda appeared to hint at a timetable for ending negative interest rates.
Given Japan is the last advanced economy to still have a benchmark rate below zero, any guidance on timing, however qualified, is significant.
Ueda told the Yomiuri newspaper that he may have enough information by year-end to judge whether wages will continue their healthy and long-desired ascent.
Sustained increases in pay have been held out by the BoJ as one of the remaining key tests for unwinding uber-easy money.
Superior decisions
In a narrow sense, the remarks were a statement of the obvious: More time means more data, which makes for superior decisions, so the arguments go.
Was Ueda, an academic until he became governor in April, riffing about theoretical possibilities or did he drop a definite clue that the main rate would rise sooner than anticipated? The latter read carried the day Monday.
The yen rallied the most in two months and yields on government bonds climbed.
The three remaining BoJ board meetings this year must now be considered very much “live,” not just for an actual shift, but for a firming up of communications aimed at pointing the way.
You can hardly blame traders for not waiting around. Markets have been blindsided by Tokyo too many times.
Ueda’s predecessor, Haruhiko Kuroda, was a fan of shocks. In Kuroda’s view, they helped mold psychology to reflect his policy preferences, whether it was the dramatic easing during his first five-year term, or the sudden move in December to let long-term market rates climb a little.
Ueda’s appointment brought hopes for a bit more consistency, yet the new governor has deployed his share of sudden revelations.
In July, he unexpectedly loosened the reins on bond yields a bit more, but left people guessing at the level of the BoJ’s preferred ceiling.
That stunner was preceded a few weeks earlier by remarks that appeared to convey no hurry to move.
“Unless the premise is shifted, the whole story will remain unchanged,” he said at that time. In retrospect, the emphasis on conditionality betrayed his inclination.
It just wasn’t picked up: More than 80% of economists surveyed ahead of the July 27-28 board meeting predicted no change.
The BoJ gives the impression that it wants to find a time machine and travel back to the world before January 2016, the month that Kuroda deep-sixed borrowing costs.
Providing compensation
The yield-curve control (YCC) was introduced about eight months later. By some estimations, the YCC was a way of compensating for the nasty byproducts of negative rates without actually admitting a mistake.
This cumbersome structure has outlived its usefulness.
To pull off anything remotely resembling a smooth exit, the bank must convince the market that its goal isn’t to make conditions tight.
The ambition is to merely make it less easy – and far more simple. Reading a BoJ statement these days can make your head spin. There’s the stance on asset purchases, one on the main rate, and something else on the YCC.
Multiple pieces of forward guidance make it even busier. A large part of the backlash against taking the rate below zero came from the financial sector.
Kuroda greatly underestimated how unpopular it would be with banks and insurers, which saw their already fine margins further squeezed.
That’s one reason Kuroda was never tempted to cut rates further during his second term, and why banking shares cheered Ueda’s latest comments.
The Topix Banks Index rallied the most since Kuroda widened the YCC’s trading bands in December.
New approach
Ueda seems to be looking for an exit from this framework. Some BoJ watchers initially thought that he would rip the band-aid off all at once, replacing YCC and even negative rates with a new approach.
Instead, he’s opted to do things step by step.
The problem, however, lies in how he’s communicated so far: After July’s surprise, it’s tough to take him at his word.
The key word right now is “wages.” While Ueda’s direct quotes in the Yomiuri were more circumspect than many reports made them seem, it’s safe to assume the bank wasn’t unhappy with how the article played.
This year’s spring wage talks yielded good results, and there are growing indications that it might not be a one-time event.
However, it’s hard to believe that, no matter how much the BoJ might want to dismantle its ageing policy, it will have enough confidence in pay trends by the end of the year to seriously adjust it.
Since inflation took off, most bets have greatly overestimated the speed at which officials might operate; it’s worth keeping in mind that nearly 18 months after prices first topped the bank’s 2% target, Ueda is hinting only that the possibility of change “isn’t zero.”
Battered yen the focus
That’s why many suspect the governor’s real target was the battered yen, which has lost about 11% against the dollar this year.
Taro Kimura from Bloomberg Economics is among them. He rightly points to the shifting communications from the bank regarding the currency in recent months.
One bit of unambiguously good news: Watching for anything hawkish from Japan’s central bank is now a respectable way to spend your day.
If on his one-year anniversary in the corner suite, Ueda can reflect on pulling the main rate back to zero and dismembering the YCC without driving the economy into a ditch, he will have earned a place in the pantheon of global monetary policy. — Bloomberg
Daniel Moss and Gearoid Reidy write for Bloomberg. The views expressed here are the writers’ own.
