Photo/Illutration Kazuo Ueda in 2016 (Asahi Shimbun file photo)

The government plans to appoint Kazuo Ueda, an economist, as governor of the Bank of Japan to succeed longtime incumbent Haruhiko Kuroda.

Ueda needs to prove his suitability for the job by answering questions from lawmakers prior to Diet approval of his appointment.

Key questions include how he assesses Kuroda’s monetary easing in a “different dimension,” which lasted for 10 years, and the current bout of inflation, as well as how he plans to steer monetary policy.

Ueda specializes in monetary policy and macroeconomics and served as a member of the BOJ’s Policy Board from 1998 to 2005.

It was the period when the BOJ introduced unconventional measures to combat deflation, such as keeping interest rates at zero and quantitative easing, which calls for purchasing securities on the open market to increase the money supply.

Ueda was a key theorist behind BOJ policy decisions, for example, by championing the “time axis effect,” or the effect from a central bank’s promise to maintain easy monetary policy for a certain period.

When the BOJ decided to lift its zero-interest-rate policy in 2000, Ueda voted against the proposal, saying it was premature.

Ueda will be the first academic to become BOJ governor. But there have been no dearth of economists leading a central bank abroad.

The government’s selections for two deputy governors under Ueda signal a relatively balanced leadership.

Ryozo Himino is a former commissioner of the Financial Services Agency and an expert of international caliber versed in financial regulations.

Shinichi Uchida is a BOJ executive director who has been in charge of planning and formulating “different dimension” monetary easing.

The new team will have to perform a delicate balancing act.

Last week, Ueda said the BOJ’s current monetary policy is “appropriate” and “needs to continue.”

He stressed the importance of two issues: “ensuring logical policy decisions” and “explaining the decisions in an easy-to-understand manner.”

Inflation has surged past 4 percent in Japan, well above the BOJ’s target of 2 percent.

However, many economists predict domestic inflation will be tamed sooner or later, with prices of overseas natural resources already stabilized.

Ueda’s argument for maintaining an easy monetary policy is understandable as a response to these circumstances.

On the other hand, the yen’s sharp weakening last year and the emergence of anomalies in the bond market point to the need of more flexible and nimble monetary policy actions.

The BOJ must not allow the nation’s economy, which has finally emerged from a state of deflation, to slip back into a deflationary morass by making a premature policy shift.

But the new leadership will be responsible for an unbiased review of the central bank’s policy.

Depending on the course of the economy, such as the wage trend, the biggest challenge for the next BOJ governor will be engineering a smooth exit from large-scale monetary easing as well as achieving price stability.

After years of “different dimension” monetary easing, the BOJ now holds more than 500 trillion yen ($3.78 trillion) worth of government bonds.

Many policymakers within the government and the ruling camp are championing fiscal policy measures based on the assumption that interest rates will remain at extremely low levels forever.

There exists the possibility that the central bank will come under government pressure not to raise interest rates when the economic and price conditions require the ending of its loose monetary policy.

If that occurs, the BOJ will be tested over whether it can take logical policy actions by protecting its independence and maintain its credibility by offering meticulous explanations to the public and markets.

We are eager to hear the new leadership candidates speak reassuringly about their commitment to tackling such challenges.

--The Asahi Shimbun, Feb. 14

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