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 for this shift lies heavily on the shoulders of the person leading the change. 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 as the "weakest currency" and what policies will he implement? This week, we take a closer look at Governor Ueda's story.

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.

The First Academic to Lead the BOJ... "Who is Ueda?" Searched After His Appointment

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

The person originally expected to become Governor was Masayoshi Amamiya, then Deputy Governor of the BOJ. Amamiya had led the implementation of all major BOJ policies at the time, including monetary easing and negative interest rates. Few anticipated Ueda's appointment. After his appointment, not only in Japan but also among overseas investors, "Who is Kazuo Ueda?" became a popular search 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 outlets had analyzed that Amamiya declined the position of Governor and, with no strong candidates left, Ueda was appointed without much opposition. However, the book "40-Year History of the Yen-Dollar War: Why Did the Yen Become the Weakest Currency?" published by Nikkei, reveals a different story. It turns out that Amamiya himself was the one who recommended Ueda for the role.

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

The Purpose of His Appointment: "Revising Easing Policies"... Taking Office with the Mandate to Raise Rates

Amamiya had closely observed Ueda during his time as a Policy Board Member at the BOJ, recognizing him as an idea man. One of Ueda's key innovations was the "time-axis policy." At a time when Japan was maintaining a zero interest rate, further monetary easing seemed impossible. However, if the central bank officially announced its intention to maintain zero rates for an extended period, it could lower long-term rates such as two-year, five-year, and ten-year bonds. This would, in turn, lower other rates, such as those on real estate loans, even while maintaining zero policy rates. This concept was devised by Ueda during his tenure as a Policy Board Member.

When Japan found itself in a situation where it had no choice but to adjust interest rates, Amamiya believed that someone like Ueda was needed to handle the transition wisely. That is why he supported Ueda's appointment. In fact, even when Ueda first raised rates last year, Japan's inflation rate had already significantly exceeded 2%, and the interest rate gap with the United States continued to widen. Nevertheless, the BOJ refrained from raising rates, maintaining a highly conservative stance toward change. As the market became aware of the long-standing side effects of the weak yen, it became clear that someone needed to step in and take action.

Thus, on March 19 last year, Governor Ueda calmly delivered 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. Although the policy rate hike at the time was minimal and did not have a significant impact on the yen-dollar exchange rate, the declaration was highly significant as it marked a complete shift in the BOJ's policy stance. Ueda's mandate was 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.

It Can't Wait Until Next Year... Accelerated Timeline for Rate Hikes

In fact, the current emphasis on rate hikes is due to the belief that what was expected to happen next year is being brought forward. Originally, Japanese securities firms such as Nomura Securities had predicted a rate hike in January of next year.

Amid these developments, on December 1, Governor Ueda attended a meeting of economic leaders in Nagoya and stated, regarding the agenda for the December monetary policy meeting, "I want to make an appropriate judgment on the issue of raising rates." This was widely interpreted as a signal that a policy change was imminent. As a result, securities firms such as Nomura revised their forecasts for the timing of the rate hike. At the meeting, Governor Ueda also touched on the upcoming spring labor-management wage negotiations and indicated that he was paying attention to the possibility that exchange rates could affect inflation. The so-called "Shunto" spring wage negotiations determine the rate of minimum wage increases.

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

However, Nomura Securities believes it will be difficult for Governor Ueda to maintain a 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 fall below 2% year-on-year. Therefore, it is expected that the BOJ will pause further rate hikes and take a breather 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, as the likelihood of a rate hike increases, concerns over the unwinding of the yen carry trade have also grown. 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 will naturally increase, leading to improved earnings for banks. While it is common knowledge that banks benefit from higher rates, another area to watch is companies with low debt and high cash reserves.

Fujii Hidetoshi, CEO of the investment firm Kabuchie, noted, "Industrial robot manufacturer Fanuc, which holds 502 billion yen (about 4.77 trillion won) in cash, and Murata Manufacturing, with 625.1 billion yen (about 5.94 trillion won) in cash, are attracting significant attention." Kenji Okayama, CEO of the investment firm Market Bank, also emphasized, "NTT, which demonstrates robust cash flow, will be reevaluated as a stable stock." Okayama added, "Companies that import goods and sell them domestically can benefit from a stronger yen, as import costs decrease. Major cooking oil producer Nisshin OilliO and Nitori Holdings, which manufactures and sells furniture and interior goods, are among those to watch." Although the market may see temporary declines in the stock prices of even high-performing companies amid volatility before and after the rate hike, investors are viewing this as a buying opportunity.

This week, we explored the story of Governor Kazuo Ueda, who must lead the BOJ's interest rate hikes amid concerns over the unwinding of the yen carry trade. We will have to wait and see how Governor Ueda fulfills his responsibilities. In the meantime, we hope you can also enjoy the rewards of successful investing in these turbulent market conditions.