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1 March 2023

The Bank of Japan’s new governor has the hardest job in economics

Ueda Kazuo faces a more extreme version of the challenge facing the UK: the end of cheap money in a high-debt economy.

By Will Dunn

It was the opinion of Ichimada Hisato, governor of the Bank of Japan from 1946-54, that when it came to public debate around the economy the central bank should “remain as quiet as the forest of a rural shrine”. Such discretion might have been possible in Ichimada’s time, but in the decades that followed, the Bank of Japan intervened in its country’s economy in increasingly radical ways.

Japan has spent decades learning a lesson that the rest of the world is only now beginning to grasp: in our new high-debt reality, central bankers are not silent technocratic stewards but active policymakers whose power over our lives exceeds that of most government ministers. 

Japan’s central bankers stimulated the economic growth that propelled their country, in the postwar era, from a shattered state under foreign occupation to the second-largest economy in the world. They also stimulated the huge asset bubble that followed, in which the land value of Japan (which is roughly the size of California) was worth four times that of the whole United States. After the bubble popped in 1991, and the country endured the first of its “lost decades”, the BoJ became the first of the world’s central banks to use a new monetary measure called quantitative easing, or QE. In doing so it set the precedent for the ultra-loose monetary policy the West would use to fight the economic crises of 2008 and 2020 – and the inflationary hangover that would follow.

Now the world’s most indebted major economy, with a debt-to-GDP ratio of 263 per cent, Japan remains the laboratory for the new economics of the post-2008 era. And because major economies are closely connected by the global financial system, decisions taken in Tokyo can affect how the UK’s government debt (and therefore your mortgage) is priced, or the exchange rates that translate into our gas prices.

Few jobs, then, are as influential within the global economy as the governor of the Bank of Japan. But the average reader will be excused for not having heard of Ueda Kazuo, a 71-year-old economics professor at Kyoritsu Women’s University, whom the Japanese government has announced as its surprise choice to decide monetary policy in the world’s third-largest economy. Most financial analysts had to google him. Once confirmed as governor, Ueda will be the first academic economist to have been appointed to the role since before the Second World War.

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This looks like a significant break from tradition: the position typically alternates between appointees from the Ministry of Finance and the Bank itself, and in the 20th century candidates could be selected decades in advance. The chosen few were referred to throughout their careers as “princes”, the economist Richard Werner records in his 2003 book on the secretive and influential world of Japanese central bankers, Princes of the Yen.

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Werner told me that in reality “true monetary policy was always made by Bank of Japan insiders… The Ministry of Finance governors were never invited into the inner circle at the Bank of Japan.” This inner circle jealously guarded the Bank’s real power – the ability to create new money – and in speeches and columns during the lost decades, central bankers opined that the long recession was actually a good thing, because it forced companies to be efficient and politicians to pursue a less regulated, market-focused economy.

Abe Shinzo, Japan’s prime minister from 2012 to 2020, was well aware of the Bank’s grip on the economy, and publicly speculated on whether to remove its independence – at which point the incumbent governor quickly left, to be replaced by Abe’s choice, Kuroda Haruhiko, who joined with a mandate to combat Bank orthodoxy. Under the new “Abenomics”, government spending and growth policies were paired with radical quantitative easing, negative interest rates and the still more extreme policy of “yield curve control”, in which the Bank buys trillions of yen in government bonds to manipulate the future cost of debt in its economy. Kuroda will step down in April.

[See also: Who sets our interest rates – the Bank of England or the US Federal Reserve?]

Werner said insiders at the Bank of Japan were never content with the radical experiments of Abenomics and would now like to regain control, but – having themselves been responsible for two decades of lost economic growth­ – they are “not yet in a position to visibly claim back their power by having one of their own appointed”.

Instead, Werner believes, the Bank is making do with a “substitute” in Ueda, whom he first met more than 30 years ago. Ueda may currently be a professor at a relatively small college, but he was previously dean of the economics faculty at the country’s leading university and a member of the Bank of Japan’s policy board from 1998-2005; Werner said his record of close association with the Bank goes back to the 1980s.

The real mystery may be why Ueda, or anyone else for that matter, would take the job. After more than a decade of low inflation in major economies, central bankers now have the fiendish task of unwinding the great QE experiment without panicking financial markets ­– and nowhere will this be more difficult than in Japan.

The UK is currently spending £83bn a year on debt interest, and this is made more expensive still by higher interest rates – but the Bank is forced to impose them anyway, in order to combat inflation. Japan is in a similar position, except its national debt is almost four times higher and the central bank has bought more than £3trn in government bonds. As inflation rises in Japan, monetary policy will have to respond (by raising interest rates and selling bonds), but in doing so it will force the country to spend even more on its mountainous debt. Policy that is poorly timed, too aggressive or too timid could provoke a recession, or the kind of market conniptions we saw after Liz Truss’s experiment with unfunded tax cuts.

Most analysts expect Ueda to lead Japan away from its ultra-loose monetary policy by allowing gilt yields to rise, raising interest rates or attempting to sell off some of the government bonds on his bank’s immense balance sheet (currently approaching three quarters of a quadrillion yen). But this must be done very carefully: flood the market and bond prices drop, yields rise uncontrollably and the cost of borrowing quickly becomes dangerous.

The process of tightening policy is being coordinated at meetings held every two months between the governors and senior officials of all the world’s big central banks, usually at the Bank for International Settlements in the Swiss city of Basel. The meetings are chaired by Jay Powell, the chair of the US Federal Reserve, but they aren’t minuted, so we know little of what’s discussed. We can guess, however, that when Ueda takes his seat, he will receive a warm welcome from contemporaries who see his appointment as a sign that the BoJ is “back in the fold”, as Werner puts it – that the domestic ambitions of Kuroda and Abe have been set aside, and that the agenda set by the Federal Reserve has taken priority once more. 

There are two ways to look at this. The first is that central banks are in a precarious situation that needs a very careful international solution – in which case, academic technocrats such as Ueda are exactly the people required. But the second is that citizens of Japan or Britain may not relish the idea that the monetary policy which influences whether they can buy a house, start a business or even vote for a radical, pro-growth politician is now being coordinated in overseas meetings dominated by the US central bank. The credit-creation measures pioneered in Japan may have “saved the world” in the financial crisis (as Gordon Brown so modestly put it), but the bill for having done so is long and variable, and it will be many years before it is paid in full.

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