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A Surprise Pick to Lead the Bank of Japan Faces a Wrenching Choice


Over the last several months, many people were mentioned as possible replacements for Haruhiko Kuroda, the long-serving governor of the Bank of Japan, who has captained the country’s decade-long experiment with ultra-easy money and rock-bottom interest rates.

Kazuo Ueda, the man officially nominated for the job on Tuesday, was not among them.

But it is Mr. Ueda, if he is approved by Parliament, who will take over as governor under an intense spotlight, as markets around the globe look for any sign of change in monetary policy by the world’s third-largest economy and biggest creditor.

The 71-year-old Mr. Ueda will be the first academic in the postwar period to become the central bank’s top leader, a position normally reserved for a bureaucrat from the finance ministry or the bank itself.

It is an unenviable task: Over the last year, rising inflation and a sinking yen have tested Japan’s ironclad commitment to monetary easing, including a gargantuan bond-buying program intended to keep interest rates down.

Since last summer, Japan has been an outlier among the world’s major central banks, which have sharply raised interest rates in an effort to curb inflation. Fiscal hawks have called for the Japanese government to walk back its monetary policies, which they argue have provided too little bang for the buck and turned the government into a spendthrift. Financial speculators, too, have tried to force the bank to abandon its position, hoping to profit if the bank retreats.

In December, Mr. Kuroda surprised markets by raising the ceiling on bond yields, effectively increasing interest rates. The move, which Mr. Kuroda said was intended to improve the functioning of bond markets, only increased speculation that the bank was planning a major policy shift.

The resulting costs have been substantial: In January, the Bank of Japan had to spend almost $179 billion on bond purchases intended to keep interest rates at its preferred level.

The decision on whether to continue the policy will now fall to Mr. Ueda.

How he will proceed is an open question, but his background suggests he’s unlikely to make any sudden changes. In a stint years ago as a member of the bank’s policy board, he was an early supporter of the unconventional economic ideas that now guide Japan.

Markets might not be familiar with him, but he is known as a deep, deliberate thinker with “incredible academic credibility,” said Jesper Koll, a director at the financial services company Monex in Tokyo.

“There is a premium on reflection, a premium on thought, rather than a premium on fast wins and immediate action,” Mr. Koll said. “The No. 1 signal is that there is no urgency to do anything radical, and at the same time there is an openness to start doing things in a new way.”

It’s not clear how Japan could gracefully reverse longstanding policies that have focused on raising inflation that was stagnant for decades before the pandemic. The theory was that dirt-cheap money would encourage a modest rise in inflation that would stimulate corporate profits. That would translate into higher wages for workers who had not seen their salaries go up in years. With more money in their pockets, they would spend more, creating a virtuous cycle.

That goal, however, has been both elusive and expensive. Over the past decade, the Bank of Japan has bought up more than 50 percent of all outstanding government bonds and has become one of the largest players in the Japanese stock market. Businesses and households have become dependent on low-interest loans; many homeowners have variable rate mortgages, which would go up along with any rise in interest rates.

Inflation is now at its highest point in 40 years, but Mr. Kuroda and others argue that the price increases are caused by temporary factors — a weak yen and supply chain disruptions — not the growing demand that the bank has sought to stimulate.

How the bank proceeds is not just a domestic concern. The course of Japanese monetary policy has significant implications for the many nations that count the country as a major investor and lender.

Markets around the world have spent months looking for signs about Mr. Kuroda’s replacement, hoping for a hint about the bank’s future.

But last Friday, when The Nikkei Shimbun, a Japanese business daily, broke the news of Mr. Ueda’s selection, the scoop came as a complete surprise to Bank of Japan watchers everywhere.

For months, speculation had largely focused on two candidates. In recent weeks, the smart money had settled on Mr. Kuroda’s right-hand man, the bank’s deputy governor, Masayoshi Amamiya.

One of the architects of Japan’s current monetary policy, Mr. Amamiya was widely seen as a safe pair of hands — unlikely to make any sudden, potentially destabilizing adjustments to the current policy. He was also regarded as the favored pick of the powerful conservative political faction once headed by former Prime Minister Shinzo Abe.

Despite Mr. Abe’s assassination last summer, the group has remained a driving force in governing-party politics and a strong supporter of the extraordinary monetary easing measures introduced by Mr. Abe after he took office in 2012.

That group’s preferences were most likely an important factor in Prime Minister Fumio Kishida’s choice of Mr. Ueda, according to Takehide Kiuchi, executive economist at the Nomura Research Institute. Mr. Kishida had probably looked for a candidate who would be “accepted by the L.D.P. conservatives who opposed revisions to monetary easing,” he said, referring to the governing Liberal Democratic Party.

Mr. Ueda can be expected to “calmly analyze the effects and side effects of individual monetary policies, and carefully implement necessary measures to mitigate the side effects,” Mr. Kiuchi said.

Mr. Ueda graduated with a Ph.D. in economics from the Massachusetts Institute of Technology, where he shared dissertation advisers with Ben Bernanke, who went on to be Fed chairman. Mr. Ueda has taught at the University of Tokyo and Kyoritsu Women’s University, where he currently works.

He served on the Bank of Japan’s policy board from 1998 to 2005. When he joined, the bank had just gained statutory independence, and Mr. Ueda was key in pushing the institution to innovate, said Gene Park, a professor of political science at Loyola Marymount University in Los Angeles, who has written about the Bank of Japan.

On the board, Mr. Ueda was one of the first people to recognize the possible dangers of deflation and to suggest responding with unorthodox measures, Mr. Park said. Mr. Ueda was an early supporter of setting a specific inflation target and shaping public expectations about price increases through a process called forward guidance. The bank later incorporated both ideas into its policy framework.

In 2000, Mr. Ueda was one of two members of the bank’s policy board who voted to continue its experiment with zero interest rates.

“He was, at that time really, I think arguably the only policy board member who was a true monetary policy expert,” Mr. Park said, adding that he was “fighting against the stream.”

More recently, he has emphasized the importance of taking a careful approach to changing the country’s monetary policy. “It’s necessary for the Bank of Japan to establish an exit policy” from its current unorthodox framework, he wrote in The Nikkei in July. He was less clear, however, on when or how that might take place.

Speaking to reporters after news of his appointment on Friday, Mr. Ueda said he felt that “the bank’s current policies are appropriate.”

Nevertheless, many experts believe that he will undertake a broad review of the existing monetary framework.

If anyone is up for the job, it is Mr. Ueda, who is regarded in academic circles as one of Japan’s top economic minds, said Paul Sheard, a former chief economist of S&P Global, who has known Mr. Ueda for decades.

“The stakes are really, really high at the moment,” Mr. Sheard said. “Hopefully history will look back on his governorship and say that this was the governorship that was able to steer monetary policy out of that deflation fighting, unconventional territory and get things back toward something that looks a little bit more normal.”



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