Central bank decisions have become more predictable. Not in Japan. Kazuo Ueda broke one of the cardinal rules of monetary practice with his recent shock hike in interest rates. Judging from his unrepentant performance in parliament last week, he absorbed few — if any — lessons from the episode. The unfortunate upshot will be an erosion of trust.
In several hours of testimony on Friday, the Bank of Japan governor pinned the blame for an early August market meltdown on anxieties about the US economy rather than anything that transpired in Japan, let alone the July 31 rate increase. The problem is that this assumes the BOJ has no agency. America is the ball game. The Federal Reserve is certainly first among equals, but local decisions also matter.
Regardless of the root cause of the Aug. 5 collapse — the Nikkei 225 Stock Average fell more than 12% and the yen soared — the BOJ bears its share of responsibility. Wall Street endured a difficult day, but nothing like the Tokyo slump. The Japanese central bank erred when it raised its main rate to 0.25%, still very low by global standards. The mistake was not the change per se, but that it was combined with a plan to slash bond purchases and a new, hawkish forward guidance that projected multiple future increases. A majority of economists reckoned Ueda would demur on a hike.
It was probably too much to hope that Ueda would concede any points of substance to political critics. His remarks left little doubt that further rate increases are coming if the economy behaves as anticipated. Many private-sector analysts project at least one more hike this year, absent a US recession. Ueda stopped short of repeating Deputy Governor Shinichi Uchida’s line of Aug. 7 that rates won’t climb when markets are unstable. Uchida didn’t countenance that the BOJ itself might have been a leading cause of instability.
Policy needs to proceed in a way that reflects assessments of the economy’s likely path. But unless the monetary authority wishes to be blamed for the next equities and currency ruckus, Ueda would be well advised to devote more attention to communication. We aren’t talking about leaks to select publications, scandalous as that is. Our point is that it’s high time the BOJ grasped that modern central banking evolves around what you say as much as what you do.
In a presentation to the Fed’s retreat at Jackson Hole, Wyoming, Eric Swanson of the University of California, Irvine, argued that investors have become better at forecasting because officials have ramped up efforts to convey their intentions. Federal Open Market Committee “announcements themselves are rarely a surprise, while significant changes in monetary policy are frequently communicated to the markets beforehand via speeches,” he wrote in a March working paper with Vishuddhi Jayawickrema of the Sri Lankan central bank. It should be compulsory reading at the BOJ.
If anything, Ueda has been predictably unpredictable. For most of his first year in office, he moved a lot slower than many expected, but now seems to have found himself stuck in top gear. In April, he agreed that the yen’s impact on prices — the currency was then trading a little below 160 to the dollar — could be “ignored.” Three months later, the currency had seemingly become such a fearsome risk to the chances of inflation surging far above the bank’s 2% goal that he said he needed to frontload a hike, without waiting for data to confirm the bank’s virtuous cycle of wages and prices. The yen? Still trading a bit below 160. At the same meeting, the bank lowered its GDP outlook for the current fiscal year to 0.6%, indicating little chance the economy would overheat.
What changed? Ueda might have felt it was now or never. September’s policy conclave will come a week before the ruling Liberal Democratic Party selects a new leader. October is just before the US election; December is a time of little liquidity. But these were dates known well in advance. A more plausible trigger was Ueda’s May meeting with outgoing premier Fumio Kishida, in which the currency was discussed. While the bank operates independently of the government, Kishida is likely to have explained growing public dissatisfaction over the currency. Ueda’s tone turned notably cautious on the yen thereafter.
The sense that politics is weighing on the previously wary and level-headed Ueda is hard to shake; his unconvincing explanations for the sudden hike, and his about-face on the impact of the yen, add to those concerns. In recent weeks, as Tokyo gears up for the first new prime minister in three years, the mood has shifted toward monetary policy normalization, whatever that means. Advocates of easy money, a position personified by the late prime minister Shinzo Abe, are in short supply these days, at least in part due to the waning influence of Abe’s former faction. Many of those running to replace Kishida have already backed higher rates.
Borrowing costs are still rock bottom relative to the US. The BOJ appears resigned to continue distancing itself from the legacy of former governor Haruhiko Kuroda, who began a massive assault on deflation in 2013. Ueda argues that times have changed; wariness toward inflation is now warranted. Fair enough. But aversion to shocks has also grown.
For now, Ueda has gotten away with it. Despite the scale of the market rout, it has been effectively retraced. A recent Nikkei survey found 54% in favor of the move — with support largest not among pensioners with fat savings accounts, but respondents in their 30s. But let early August serve as a warning: Ueda must follow his global peers in making decisions less of a lottery. Bring communication in from the cold.
Credit: Bloomberg
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