Welcome, BoJ Governor Ueda

The post-Kuroda BoJ will be more thoughtful than fast - it's not just about designing a more sustainable new policy framework, but about promoting a more efficient financial system, including crypto

Some personal observations on the newly appointed BoJ Governor team:

• Professor Ueda Kazuo has just been appointed to become the next Bank of Japan Governor. He is a brilliant theoretical economist, who has been extremely influential in providing the theoretical back-bone for the BoJ’s progressive adventures into un-conventional monetary policy ever since the fight against deflation became serious from the mid-1990s - first as a breath-of-fresh-air rising star Tokyo University economics professor and then as BoJ Policy Board Member (1998 to 2005). He is not a man of dogma, but one of science; a deep and creative thinker who is not afraid to test his hypothesis in the real world. He is thoughtful, he does not shoot from the hip, and will be seeking to design an optimal sustainable policy framework rather than looking for big, quick wins.

August Rodin - The Thinker

• In stark contrast to previous BoJ Governors, he is neither exBoJ nor exMoF. Typically, Governors who were exBoJ tended to be more pro-free market and central bank independence; while those with a MoF background tended to favor market control and close cooperation with the treasury. Instead, Ueda-sensei was THE teacher to most of the current top technocrats at both BoJ and MoF, lecturing both sides on the theoretical rights and wrongs of their proposed actions. He has never been shy to point out to even most senior leaders the unintended consequences of their inherent institutional bias and intellectual rigidity.

• Specifically, he is an expert at estimating trade-off costs of policy actions. The current “Kuroda-Abe Accord” between BoJ and MoF, for example, guarantees low funding for the enormous public deficit, but it makes it impossible for the financial sector to price risk assets properly (credit or equities or real estate). Ueda-sensei’s theoretical work and background naturally makes him more free-market than interventionist. 

• This does not mean he thinks Yield-Curve-Control must go; instead, a credible and theoretically sound path towards yield curve liberalization must be designed.  Specifically: I would not be surprised to see his BoJ present a new model that estimates what the current optimal 10-year yield should be, and then set the yield cap at exactly that level, for example. It is not about “free markets” at all costs, but about the post-Kuroda BoJ working harder to find the optimal balance between market control and market function. 

• Designing a thoughtful and theoretically sound exit from the “Kuroda-Abe-Accord” will be an overarching agenda item. Like Prime Minister Kishida’s “New Capitalism”, this ambition for a new grand design is unlikely to result in significant policy action in the immediate future. There is neither the urgency for it - inflation rates are poised to be coming down in coming months; nor is there pressure to spend political capital: when Governor Kuroda took over, Japan was in a crisis and led by an impatient and demanding PM Abe who needed to prove that “Abenomics” can create growth. When Governor Ueda assumes office, Japan is doing perfectly fine and PM Kishida is unlikely to see his popularity recover if his new Governor acts prematurely. 

• Ueda-sensei is a good & thoughtful communicator, naturally more comfortable with long-form logical arguments than snappy slogans or Larry-Summers-style-here’s-why-I’m-right type insistence. He’s a very good listener and has always sought pro-actively discussions and input from major market players. 

• Real structural change — all eyes Deputy Governor Himino 

• The choice of his deputy Governors is extremely interesting. It’s a new variation on the time-honored BoJ-MoF combo, with the MoF man, Himino-san, actually coming from a highly successful career at the FSA, Financial Supervisory Agency (after Tokyo University, he did enter MoF first, then transferred to the FSA in 2006 and became FSA Commissioner in 2020).

• This marks not only a new stage in BoJ-MoF relations, but underscores, in my view, one of the key policy priorities for the BoJ: while Japan’s top-tier banking system is consolidated, well capitalized and globally competitive, Japan’s secondary banking system is in dire need of consolidation, i.e. too many regional banks and too many credit cooperatives & credit unions particularly in the regions. By elevating a former FSA Commissioner rather than a former MoF Vice-Minister to BoJ Deputy Governor this long-overdue consolidation is poised to accelerate — the FSA Commissioner knows better than anyone exactly where the bad assets (and bad actors) are hiding in the hinterlands of Japan’s financial system.  

• Last autumn, Himino-san presented a policy proposal to incentivize Japan’s domestic banks to use “growth backed loans” as opposed to the dominant practice of lending only against tangible assets, often with excessive collateral demands. By advocating “growth backed loans”, Himeno-san seeks to promote start-ups and entrepreneurship.

• Moreover, as FSA Commissioner Himino-san was very influential in creating Japan’s crypto legislation and regulation. He has been in many ways, one of Japan’s most constructive advocates for crypto and blockchain technologies, not just for finance but for society.

• All said: incoming deputy Governor, Himino-san is poised to spearhead both, the consolidation of the old Japan banking system and the promotion of a new Japan blockchain-based financial community.

These are some initial observations based on personal interactions over the past decades. While it is tempting to interpret the appointment of a 71-year old academic as a compromise by an increasingly embattled Prime Minister Kishida, there may well be inherent wisdom to selecting a committed thinker rather than a cunning operator.

I suspect global market players may not like this new setup initially, and it is true that the “surprise” choice of Ueda over the long anticipated and well-analyzed BoJ veterans Amamiya or Nakaso does add new uncertainties. But if, as I suspect, the new BoJ Team Ueda delivers steadfast predictability, resilience to market pressure, and new growth & profit opportunities for domestic financial institutions, Japan’s risk-asset markets may be well on their way for more home-grown performance drivers.

In many ways, the world is trying to move on from the “move fast and break things” era that gave us first unfettered market fundamentalism and then unprecedented central bank intervention, Japan’s new BoJ Team may well show the way by being more thoughtful than fast.

As always, comments welcome. Many cheers from cold & rainy Tokyo ;-j