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Japan’s monetary policy is always under scrutiny, and the statements of the Bank of Japan (BOJ) Governor can significantly impact the foreign exchange market. Recently, Governor Ueda’s remarks became the catalyst for a temporary return of the USD/JPY exchange rate to the 141 yen range. However, subsequently, the exchange rate fell again to the 146 yen range. This volatility in the market is attributed to expectations regarding Governor Ueda’s inclination towards the removal of negative interest rates, coupled with political factors.
Governor Ueda and Expectations for the Removal of Negative Interest Rates
Governor Ueda made statements during the December 7th session of the House of Councillors Committee on Financial Affairs, expressing his anticipation of a more challenging situation towards the year-end and into the next year. This led to a temporary surge in the USD/JPY exchange rate to the 141 yen range. However, following reports by Bloomberg suggesting that “there is hardly any need for the BOJ to rush to lift negative interest rates this month,” the exchange rate dropped again to the 146 yen range. Considering Ueda’s view that negative interest rates are already ineffective, the removal is perceived as viable at any time.
Tug of War between Monetary Policy and Politics
The direction of monetary policy is influenced not only by theoretical considerations but also by political circumstances. Since the 1990s, a dynamic of “BOJ inclined towards tightening vs. Government opposing tightening” has been observed in Japan. Governor Ueda himself experienced the difficulty of such decisions during the zero-interest-rate policy’s removal in 2000. The government exercised the unprecedented right to postpone the decision, but it was eventually rejected, leading to the policy’s removal. However, subsequent changes in economic conditions led to a return to zero interest rates, highlighting the susceptibility of monetary policy to political factors.
The zero-interest-rate policy’s removal in 2000 is famously considered a century’s blunder for the BOJ. Despite the government’s opposition at the time, it was eventually lifted. However, with the unsettling global economic atmosphere following the burst of the IT bubble in the United States, the BOJ revised its economic assessment downward in December of the same year. By February 2001, they lowered interest rates to zero again, followed by the initiation of the first quantitative easing in March—a series of events often referred to as a significant failure.
Political Fund Issue and Instability in the Government
Recently, the emergence of political fund party issues has raised a yellow flag for the government’s stability. This issue could potentially influence the direction of financial policy, and market participants are wary of political instability factors. Notably, during the period when the government was under the leadership of Prime Minister Mori, Deputy Chief Cabinet Secretary Shinzo Abe opposed the zero-interest-rate policy’s removal in 2000. This event is considered a turning point that gave rise to the strong call for monetary easing, eventually leading to Abenomics.
Expansion into Abenomics and the Ideology of Monetary Easing
The failure of the zero-interest-rate policy’s removal in 2000 influenced Shinzo Abe’s strong belief in monetary easing, paving the way for Abenomics. During his tenure as Deputy Chief Cabinet Secretary, Abe’s involvement during the 2000 zero-interest-rate removal failure contributed to the emergence of a strong ideology advocating for aggressive monetary easing. Subsequently, Abenomics presented a different monetary policy approach as part of stimulating the Japanese economy, and this philosophy has persisted to the present day.
Conclusion
Governor Ueda’s statements and the trajectory of monetary policy are intricately linked to historical developments and political factors. Choosing the right monetary policy requires not only theoretical validity but also a thorough consideration of political tug-of-war and changes in economic conditions. The current market is highly responsive to Governor Ueda’s removal intentions and political uncertainties, and the impact of these elements on the yen exchange rate and monetary policy will continue to be closely monitored.
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