Governor Kazuo Ueda’s Leadership Style in Focus Amid “Yen Carry Unwinding” Fears [Japan Insight]

BOJ’s First Academic Governor
Appointed with Strong Backing from Former Deputy Governor
Mandate: Revising Easing Policy and Managing Side Effects
Nomura Securities: “Rate Hikes Up to 0.75%... Likely Pause Next Year”

As the Bank of Japan (BOJ) prepares to raise interest rates, fears over the unwinding of the yen carry trade are also mounting. The responsibility weighing on the leader driving these decisions is considerable. However, Kazuo Ueda, the current Governor of the BOJ, was originally appointed with the mission of raising interest rates. Will Governor Ueda be able to overcome the stigma of the yen being labeled the "weakest currency" and what policies will he pursue? This week, we share the story of Governor Ueda.

Kazuo Ueda, Governor of the Bank of Japan, is delivering a greeting at the meeting of economic leaders held in Nagoya on the 3rd. Bank of Japan.

BOJ's First Academic Governor... "Who is Ueda?" Searched After Appointment

Born in 1951, Governor Ueda is the first academic to serve as Governor in the history of the BOJ. Traditionally, the BOJ Governor has been selected from within the central bank or from the Ministry of Finance, which is equivalent to the Ministry of Economy and Finance in Korea. However, Governor Ueda graduated from the University of Tokyo, earned his Ph.D. in economics from the Massachusetts Institute of Technology in the United States, and later served as a professor at the University of Tokyo. Although he briefly served as a Policy Board Member of the BOJ from 1998 to 2005, he subsequently returned to academia.

The original frontrunner for the governorship was Masayoshi Amamiya, then Deputy Governor of the BOJ. Amamiya had led the introduction of all major policies implemented by the BOJ at the time, including monetary easing and the negative interest rate policy. Few expected Governor Ueda to be appointed. After his appointment, not only in Japan but also among overseas investors, "Who is Kazuo Ueda?" became a popular search query on Google.

Ueda, then a Policy Board Member of the Bank of Japan (BOJ) (right), and Haruhiko Kuroda, former Governor of the BOJ, attended a symposium held ahead of the May 2016 meeting of the G7 finance ministers and central bank governors. Photo by Yonhap News Agency

Most Korean media had analyzed that Amamiya declined the position of the next governor and, with no strong candidates remaining, Governor Ueda was appointed without much resistance. However, the book "40 Years of the Yen-Dollar War: Why Did the Yen Become the Weakest Currency?" published by Nihon Keizai Shimbun (Nikkei), reveals a different story. It was actually Amamiya himself who recommended Ueda for the governorship.

After news of Ueda's appointment was released, Amamiya reportedly told an associate over the phone, "What do you think? The next regime will be ideally structured," in a cheerful tone. When asked if he had any lingering attachment to the governorship, he replied, "Of course not. I was the one who recommended Ueda for the position and made it happen. I believe this is the best thing I have done since joining the BOJ."

Appointed to "Revise Easing Policy"... Took Office with the Mandate to Raise Rates

Amamiya had been closely watching Ueda during his time as a Policy Board Member, recognizing him as an "idea man." One of Ueda's innovations was the "policy duration commitment." At a time when Japan was maintaining a zero interest rate, once the policy rate reached zero, there was no further room for monetary easing. However, if the central bank officially announced its intention to maintain zero rates for an extended period, it could lower long-term interest rates for two-year, five-year, and ten-year bonds. This, in turn, would lower other rates, such as those on real estate loans, even while maintaining zero rates. Ueda devised this policy during his tenure as a Policy Board Member.

Amamiya believed that as Japan reached a point where it could no longer avoid adjusting interest rates, someone was needed to handle the situation wisely. That is why he pushed for Ueda's appointment. In fact, even when Governor Ueda first raised rates last year, Japan's inflation rate had already exceeded 2% and the interest rate gap with the United States continued to widen. Nevertheless, the BOJ did not raise rates, maintaining an extremely conservative stance toward change. As the market became aware of the long-standing side effects of a weak yen, it became necessary for someone to step in and address the situation.

Thus, on March 19 last year, Governor Ueda calmly read a statement at his appointment press conference, and on the same day, the BOJ officially announced at its monetary policy meeting that it would end its large-scale easing policy. The policy rate hike was minimal at the time and did not have a significant impact on the yen-dollar exchange rate. However, the declaration was highly significant in that it marked a complete shift in the BOJ's policy direction. Governor Ueda's mandate was already to "raise interest rates and manage the side effects."

On December 25 last year, Governor Ueda attended the Policy Board Meeting of the Japan Business Federation and spoke on the topic of "Achieving the 2% Inflation Target and the Japanese Economy." Bank of Japan.

Could Not Wait Until Next Year... Accelerated Rate Hike Timeline

In fact, the current emphasis on a rate hike is due to the expectation that it will occur earlier than originally anticipated. Nomura Securities and others had predicted that the BOJ would raise rates in January of next year.

Amid these expectations, Governor Ueda attended a meeting of economic leaders in Nagoya on the 1st of this month and stated regarding the agenda for the December monetary policy meeting, "I want to make an appropriate judgment on the issue of raising interest rates." This was widely interpreted as a signal that a policy change would occur at that time. As a result, securities firms such as Nomura Securities promptly revised their forecasts for the timing of the rate hike. At the meeting, Governor Ueda also hinted at his attention to next year's spring labor-management wage negotiations and the potential impact of exchange rates on inflation. The minimum wage increase rate is determined at the so-called "Shunto" spring wage negotiations.

He also said, "Even if we raise the policy rate, it is merely an adjustment within an accommodative financial environment," adding, "It is a continuation of the efforts by the government and the BOJ to ultimately achieve success." This suggests that there are no major differences with the newly launched Takaichi administration.

However, Nomura Securities believes that Governor Ueda will not be able to continue the rate hike stance indefinitely. Once the policy rate reaches around 0.75%, there is a high likelihood that the core Consumer Price Index (CPI) will slow to below 2% year-on-year. Therefore, the probability is high that additional rate hikes will pause around the second half of next year.

On the 18th of last month, Sanae Takaichi, the Prime Minister of Japan, and Kazuo Ueda, Governor of the Bank of Japan, met and shook hands. The two discussed interest rate hikes on that day. ANN.

Are Rate Hikes Always Bad? Investors Eye New Beneficiaries

Meanwhile, the growing likelihood of a rate hike has also heightened concerns about the unwinding of the yen carry trade. However, Japanese investors advise that some sectors may actually benefit from higher rates. Japanese analysts are particularly highlighting bank stocks. As interest rates rise, lending rates naturally increase, leading to improved earnings prospects for banks. While it is obvious that banks benefit from higher rates, another focus is on companies with low debt and large cash reserves.

Fujii Hidetoshi, CEO of the investment firm Kabuchie, said, "Fanuc, an industrial robot manufacturer with cash holdings of 502 billion yen (4.7732 trillion won), and Murata Manufacturing, with 625.1 billion yen (5.942 trillion won) in cash, are both attracting significant attention." Kenji Okayama, CEO of the Japanese investment firm Market Bank, also emphasized, "NTT, which boasts robust cash flow, will be re-evaluated as a stable stock." Okayama added, "Companies that import goods and sell them domestically can benefit from a stronger yen, as it reduces import costs. Major edible oil company Nisshin OilliO and Nitori Holdings, which manufactures and sells furniture and interior goods, are among those to watch." Although the market may be volatile before and after the rate hike, causing even high-performing companies' stock prices to temporarily dip, investors are viewing this as a buying opportunity.

This week, we have looked at the story of Governor Kazuo Ueda, who must lead the BOJ's rate hike amid concerns over the unwinding of the yen carry trade. We will have to watch how Governor Ueda fulfills his responsibilities going forward. We hope you can also share in the joy of successful investments amid these volatile market conditions.