By Noriyuki Suzuki,
Bank of Japan chief Kazuo Ueda on Tuesday marked one year since taking up his post, leading one of the world's most dovish central banks to depart from its policy of unorthodox monetary easing measures undertaken by his predecessor.
With negative interest rates and the yield cap program now gone, financial markets are looking at when the BOJ will decide to increase interest rates again following its first rise in 17 years which it carried out in March.
A persistently weak yen -- and the risk of more cost-push inflation due to a recent uptrend in crude oil prices -- now pose challenges to Ueda, who about a year ago described the top job at the Japanese central bank as "difficult" for whoever was to take it.
Ueda, whose five-year term ends in 2028, said that the monetary policy framework was "complex" when he became governor last year and stated he hoped to make it "simple and easier."
"Partly they (the policy changes) were made possible because economic conditions were relatively good," Ueda told a recent parliamentary session ahead of the first anniversary. "We will respond to changes in the economic environment appropriately under the new framework."
At its March meeting, the nine-member Policy Board scrapped the negative rate policy that was introduced in 2016 and set short-term interest rates within a range of zero and 0.1 percent.
It also removed a cap on 10-year Japanese government bond yields, a measure intended to keep borrowing costs extremely low to support businesses and households. The central bank's aggressive bond buying drew criticism that bond markets had become distorted, and its balance sheet swelled.
The recent overhaul of the monetary easing framework, which had been a hallmark of former Prime Minister Shinzo Abe's "Abenomics" program intended to stimulate the economy, came as another year of strong wage growth made the BOJ more confident about the chances of finally attaining its target of stable inflation at 2 percent.
Financial markets have reacted calmly to the BOJ's move to put an end to the last vestiges of an era that began under Haruhiko Kuroda, Ueda's predecessor who was governor from March 2013 to April 2023. This was because the central bank dropped hints as to what may come beforehand, allowing markets to price them in, according to analysts.
"The BOJ has finally aligned itself in the same direction as its U.S. and European peers after a long delay," said Shinichiro Kobayashi, a senior economist at Mitsubishi UFJ Research and Consulting.
"But now, the Fed (Federal Reserve) is expected to wait longer before it starts cutting rates and could implement fewer cuts, while the yen remains persistently weak despite the BOJ's move. The BOJ may go ahead with a rate hike this summer," Kobayashi added.
The BOJ has taken the view that cost-push inflation, or price hikes caused by higher import costs will not suffice even if Japan achieves stable inflation. Strong pay hikes that support domestic demand, namely private consumption, are crucial, it said.
Policymakers have expressed optimism about a positive cycle of pay and price hikes since this year's "shunto" wage negotiations yielded their best outcome in over three decades. Data by Rengo, the umbrella group of trade unions, showed an average 5.24 percent hike offered by Japanese firms.
Around the time when Ueda became the first BOJ chief to hail from academia in the postwar period, he said there were "good buds" emerging for pay hikes and inflation.
A year later, the BOJ maintains that attaining the 2 percent inflation target is a goal that has "come into view." Ueda said last week underlying consumer inflation will rise going forward.
The rising cost of living has become a drag on consumers but the economy has escaped slipping into recession, despite soft domestic demand.
The output gap turned positive for the first time in 15 quarters at the end of 2023, according to the BOJ's data. When it is positive, it points to inflationary pressures.
Economists at UBS Securities warn of the negative effects of higher cost-push inflation driven by a sharp drop in the yen on consumers, boosting the case for Japanese authorities to intervene and stop it from falling toward the 155 level against the U.S. dollar.
There is a "high possibility" that the BOJ will raise its policy rate in July, or even June, rather than the baseline scenario of October, according to Masamichi Adachi, chief economist for Japan at UBS Securities.
Ueda has said the BOJ does not target foreign exchange rates in guiding monetary policy but their movements can become an "important factor" affecting the economy and prices, triggering a policy response. The dollar was just below the 152 yen line, a level unseen in three decades.
For Ueda, who sat on the BOJ's policy board between 1998 and 2005 and taught at Kyoritsu Women's University in Tokyo, stable inflation is what he has called a "goal sought for decades."
BOJ watchers are keeping tabs on the pace at which the central bank decides to further raise interest rates under Ueda given past examples of hikes coming at a bad time, such as before the bursting of the dot-com bubble and the 2008 global financial crisis.
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