'Longest-Serving Governor' Changing Bank of Japan... When Will Ultra-Low Interest Rates End?

Prime Minister Kishida Officially Confirms Replacement of Japan's Bank Governor
Policy Shift Possible After Kuroda's Retirement in April
End of a Decade of Ultra-Low Interest Rates... Side Effects Emerge

Kuroda Haruhiko, Governor of the Bank of Japan [Photo by Yonhap News]

Japanese Prime Minister Fumio Kishida announced that he plans to replace Bank of Japan Governor Haruhiko Kuroda in April, leading to analyses that the era of ultra-low interest rate policy, which has continued for the past decade, is approaching a turning point.

Prime Minister Kishida appeared on a Japanese private broadcaster on the 22nd and said regarding the appointment of the Bank of Japan governor, "First of all, the person will change." Governor Kuroda, who took office in March 2013, is the longest-serving governor in the history of the Bank of Japan, and his second term ends on April 8.

Kishida expressed his intention to present Kuroda's successor to the National Diet next month. Locally, candidates mentioned include former Deputy Governor Hiroshi Nakaso and current Deputy Governor Masayoshi Amamiya, both from the Bank of Japan, as well as Masatsugu Asakawa, President of the Asian Development Bank (ADB), who comes from the Ministry of Finance.

Since it has been made clear that Governor Kuroda will not be reappointed, the ultra-low interest rate policy he has supported for nearly 10 years may also change. Japan's ultra-low interest rate policy began in 2013 during former Prime Minister Shinzo Abe's administration with the intention of "reviving the economy with money."

At that time, the Bank of Japan and the government announced that they would implement large-scale monetary easing and ultra-low interest rate policies to escape deflation (long-term price decline) that had continued since the 1990s and to stimulate the economy. Since then, Japan has lowered short-term interest rates to -0.1% and guided the 10-year government bond yield, a long-term interest rate indicator, to around 0%.

[Image source=Yonhap News]

However, with Japan's inflation rate recently reaching its highest level in 41 years and the trade deficit expanding to a record high, many opinions suggest that Japan can no longer maintain an accommodative monetary policy.

According to the December Consumer Price Index (CPI) released by Japan's Ministry of Internal Affairs and Communications on the 20th, Japan's prices rose 4.0% year-on-year, marking the highest level in about 41 years since December 1981. Although the 4% inflation rate is lower compared to South Korea (5.0%), the United States (6.5%), and the Eurozone (9.2%), it is a significant burden for Japan due to very low wage growth caused by over 20 years of prolonged stagnation.

Additionally, on the 19th, Japan's Ministry of Finance announced that last year's trade balance recorded a deficit of 19.9713 trillion yen (approximately 193 trillion won), the largest since comparable statistics began in 1979. The Ministry of Finance explained that the cause of the trade deficit was "a sharp increase in import costs due to the depreciation of the yen and rising international raw material prices."

While most major central banks, including the U.S., sharply raised benchmark interest rates last year in response to inflation, the Bank of Japan maintained its "solo low interest rate" policy. As a result, the yen, which was around 115 yen per dollar in early January last year, fell to 150 yen in October, the lowest level in 32 years.

The Bank of Japan is implementing a yield curve control (YCC) policy that aims to keep the 10-year government bond yield at 0% by purchasing unlimited government bonds to keep the yield within a target fluctuation range. To do this, the Bank of Japan is using enormous public funds. Ayako Sera, an analyst at Sumitomo Mitsui Trust Bank, pointed out in an interview with Bloomberg, "It is clear that the Bank of Japan cannot continue its current large-scale bond purchases."

Researcher Sanghyun Park of Hi Investment & Securities said, "This month, the Bank of Japan decided to maintain the current YCC policy, but we highly evaluate the possibility of abolishing the YCC policy in April," adding, "While major central banks such as the U.S. Federal Reserve (Fed) and the European Central Bank are raising interest rates and conducting quantitative tightening, the Bank of Japan's continued quantitative easing policy has reached its limit."

Opinions differ somewhat regarding the timing of the policy shift. Yoonjung Park, a researcher at NH Investment & Securities, explained, "Japan has weak domestic conditions to trigger inflation, making it difficult to proactively respond to policy like the Fed. After confirming global economic conditions and the results of Chuntu (spring wage negotiations), it may be possible to consider expanding the YCC band in the second half of the year."

This content was produced with the assistance of AI translation services.