By Tomoyuki Tachikawa,
After naming his choice for the Bank of Japan's next governor, who is expected to pave the way for an eventual normalization of monetary policy, Prime Minister Fumio Kishida is likely to be urged to take steps to boost the flagging economy to prepare for such a transition.
Should the central bank try to taper its purchases of government bonds, long-term interest rates would rise and debt prices fall. That would discourage companies and households from borrowing and thus hurt investment and consumption.
Moreover, Kishida is believed to be eager to carry out large-scale tax hikes to fund a planned expansion of the defense and child care budgets. Higher taxes would likely stifle domestic demand in Japan and in turn deal a blow to the broader economy.
If Kishida hopes his nominee for BOJ governor, Kazuo Ueda, will normalize monetary policy, then the onus is on the government to take measures to prevent the economy from slowing, such as by accelerating strategies to bolster industrial competitiveness, analysts say.
On Feb. 14, the Kishida administration presented Ueda, a professor emeritus at the University of Tokyo, to parliament as its candidate for the next BOJ governor to replace Haruhiko Kuroda, in its first leadership change in 10 years.
Ueda, a former BOJ board member, would become the first central bank governor hailing from academia in postwar Japan. He is expected to be tasked with addressing the side effects of protracted monetary easing undertaken under Kuroda and eventually normalizing policy.
Kuroda's successor is also set to play a role in restoring the independence of the central bank, which has been undermined for the past decade by apparent interventions by the government in monetary policy decisions under the "Abenomics" reflation program.
That program, which entailed aggressive monetary easing, massive fiscal spending and an economic growth strategy, was promoted by the slain former leader Shinzo Abe during his second term as prime minister from 2012 to 2020. Abe was shot during an election campaign speech last year.
Takahide Kiuchi, an executive economist at the Nomura Research Institute, said Kuroda's policy path is certain to be reviewed gradually under Ueda, who has a different perspective on monetary easing from the incumbent governor.
Ueda has put emphasis on traditional monetary policy, in which the central bank controls money supply by targeting short-term interest rates, instead of the current unconventional easing that involves buying a vast amount of government bonds, Kiuchi said.
Once Ueda as expected becomes governor in April, the BOJ will conduct "cautious monetary policy while monitoring the impact" on financial markets and private banks, said Kiuchi, a former BOJ board member, adding that it would be "the first time in 10 years" for the central bank to take such an approach.
In December, the BOJ decided to allow 10-year yields to trade in a range of minus 0.5 percent to 0.5 percent, wider than the previous band of minus 0.25 percent to 0.25 percent, a move the central bank said was aimed at fixing market distortions.
The BOJ, however, said it owned a record 564 trillion yen ($4.18 trillion), or more than 50 percent, worth of outstanding Japanese government debt as of the end of 2022.
The issuance of central government bonds has topped 1,000 trillion yen. Japan's fiscal health is the worst among major developed nations, with debt over twice the size of its economy.
If the BOJ starts to decrease its holding of government bonds, possible increases in long-term interest rates and the value of the Japanese currency would curb recent price hikes, which have been weighing on consumer spending and investment at home.
When Japanese long-term yields climb, the yen tends to gain against the U.S. dollar on expectations that the interest rate gap between the world's third-biggest economy and the United States will shrink down the road.
A stronger yen usually lowers import prices, helping contain inflation, but it also dampens Japan's exports by making the nation's products more expensive abroad and cuts the value of overseas revenues in yen terms.
Export-oriented Japan's potential growth rate -- defined as economic expansion that can be achieved when capital stock, the labor force and other resources are optimally utilized -- has faced a downward trend for decades, sliding to 0.5 percent in 2022.
"It is utterly meaningless to ease monetary policy when many firms and individuals are reluctant to spend money," a BOJ official said, criticizing the government for failing to advance a growth strategy for the past 10 years.
The central bank is "not an organization that should underwrite government debt," the official added, saying that it was the job of political leaders to "map out policies to maximize the effectiveness of the central bank's monetary easing."
On the domestic economic front, the rapid aging of the population and the declining birthrate have pushed down the country's potential growth rate further.
Many pundits, therefore, have asked the government to strike free trade agreements with more economies and strengthen economic security so that Japanese enterprises would become more willing to tap into global markets to earn foreign currency.
Yasuhide Yajima, chief economist at the NLI Research Institute, said that "Japan has benefited from globalization" and that the resource-poor nation "has no choice" but to capitalize on development opportunities in other countries against a backdrop of a lower birthrate.
The number of babies born in Japan is estimated to have slipped to a record low for a seventh straight year in 2022, falling below 800,000 for the first time since the government began compiling statistics on births in 1899, official data showed late last year.
As demand in Japan decelerates, the Kishida administration "needs to win in the arena of international rule-making" to secure routes to sell the nation's products and services across the world, Yajima added.
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