The BoJ’s blast from the past
Kazuo Ueda’s record of tactical dissent
Financial markets were seemingly surprised that the Japanese government has chosen to nominate Kazuo Ueda to the Governorship of the BoJ after Deputy Governor Masayoshi Amamiya reportedly declined the role. Amamiya was seen as affording some continuity with Kuroda’s policies and so the announcement led to a 1.4% jump in JPY versus USD.
For those of us who covered the BoJ in the late 1990s and early 2000s, myself included, Ueda is a blast from the past, having served on the policy board between April 1998 and April 2005. Ueda was there for the adoption of the zero interest rate policy in 1999, its abandonment in 2000 (more of which later), and the first experiment with QE from March 2001.
Needless to say, the BoJ did not cover itself in glory during this period. The policy board assumed that zero interest rates meant policy was easy, almost by definition. Former Governor Hayami was explicitly liquidationist in outlook. His view was that easy monetary policy created moral hazard for politicians and took pressure off them to engage in structural reform. The result was that Japan got neither. Japan’s first experiment with QE from March 2001 served mainly to accommodate the demand for excess reserves on the part of Japan’s financial institutions. Japan anticipated many of the mistakes that would later be made by the Fed.
When I visited the BoJ in October 2000, Krugman’s 1998 Brookings paper on reflation through quantitative policy instruments was viewed with deep suspicion by the officials I met. The BoJ engaged Alan Meltzer and Robert Hetzel to advise on quantitative approaches to monetary policy, but never really internalised their insights. BoJ research at the time suggested it had little conviction in QE’s effectiveness.
There was an over-reliance on conditioning expectations in relation to the duration of easing in the overnight call rate, but also a reluctance to embrace explicit inflation targeting. Inflation targeting was seen as a normative endorsement of inflation, threatening a return to the ‘wild inflation’ of the 1970s that haunted Japanese policymakers like the Weimar inflation has long haunted the German public.
The BoJ rejigged its policy framework and strategy so many times, its ability to influence expectations was eventually completely shot. The informal power-sharing arrangements with the MoF in relation to the BoJ Governorship undermined continuity of policy. The MoF prioritised exchange rate management and fiscal policy over monetary policy. The Japanese government’s fiscal expansions were followed by botched fiscal consolidations. Even the real shocks, like the inflection in Japan’s population to outright contraction, were partly policy choices.
Yet Ueda had an interesting record of dissent, shown in the following charts of the distribution of dissents relative to the policy board’s decisions on the overnight call rate before March 2001 and then the target range for QE subsequently (the charts are taken Hiroshi Fujiki’s working paper):
Most notably, Ueda dissented from the now notorious decision to move away from ZIRP in August 2000. The reasons Ueda gave at the time were largely tactical and he fell back in line with the policy board consensus the following meeting. But his reservations about tightening at that time were essentially correct. The minutes of the meeting noted that ‘price indexes on the whole were expected to be stable or slightly weak.’ The government representatives on the policy board requested the vote be postponed until the next meeting, but were overridden under Article 19(3) of the BoJ Law.
Ueda also dissented in favour of easier policy in February 2001 along with serial policy dove Nobuyuki Nakahara and Teizo Taya. The minutes of the meeting don’t give explicit reasons, simply referencing the discussion elsewhere in the minutes, but Ueda’s dissent anticipated the introduction of QE the following month, showing Ueda to be on the front foot. Nakahara was never taken particularly seriously and his dissents were seen as somewhat idiosyncratic in motivation, typically invoking a fiscalist perspective. But especially with the benefit of hindsight, they were directionally correct and also rather brave politically. Taya’s record of dissent was more mixed.
During the first experiment with QE, Ueda dissented from the policy board’s decision to raise the target for current account balances in October 2003, along with Taya and serial policy hawk Miyako Suda. The minutes are again a little vague in relation to Ueda’s dissent, but it seems to have been motivated mainly by tactical considerations rather than opposition to more QE.
Ueda’s speeches during the period and subsequently are mostly somewhat descriptive, although contain discussion of the many issues the BoJ was confronting at the time. Ueda also published a book in 2005, The Battle with Zero-Interest Rates: Reviewing the BoJ’s Monetary Policy. There has been a lot of water under the macro bridge since then, but it would be interesting to examine what he considered to be the main lessons from these earlier efforts to reflate the Japanese economy. A Japan-based reader of the newsletter tells me that it seems to be out of print on Amazon.co.jp, with no second-hand copies available. If any other readers can help track it down, that would awesome.
Markets are still wedded to the idea that the BoJ needs to exit yield curve control sometime soon. Kuroda cleverly wrong-footed the market by widening the yield target range when the market was not expecting it, prompting loud complaints from those who had previously positioned for just such an eventuality but were then outfoxed.
As we have noted in this space before, the yield target is the bond market analogue of Lars Svensson’s footproof way of escaping a liquidity trap through foreign exchange market intervention and a price level target. The global inflation shock was a gift to the BoJ, affording an opportunity to consolidate some of the gains from Abenomics. As a veteran of earlier attempts to reflate the Japanese economy, it is hard to see Ueda wanting to throw it all away by rushing to exit the yield curve target. The short JGB trade may have a few widows left in it yet.
ICYMI
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