New BoJ governor triggers speculation

Japanese Prime Minister Fumio Kishida had earlier this week announced the name of the new governor of Bank of Japan, and it has sparked much speculation in the economy circles. The new man is Kazuo Ueda, the Massachusetts Institute of Technology (MIT)-trained economist and a professor. He will replace Haruhiko Kuroda, who had been governor for a decade. It is not usually the case that an academic is chosen to head the central bank, though Ueda’s credentials as the man who knows his monetary policy theory is impeccable. The choice is made from the Ministry of Finance, someone who is already party of the top brass of the bank, and even a politician. But never an academic. So, Prime Minister Kishida had broken with practice in choosing the BoJ governor. The intense debate is inevitable because Japan’s interest rates have been hovering around zero for two decades and more and Kishida’s predecessor, the late Shinzo Abe, wanted the interest rates to remain low believing that it would stimulate growth. But that has not happened. The Japanese economy had gone into a recession in the 1990s and it has not recovered ever since. The zero-level interest rates were maintained to get the economy out of its deflationary mode.

Prime Minister Kishida feels the need to move away from the tried, tested and failed strategy, but it seems he needs to do so without any loud fanfare. Compared to Abe, Kishida remains a low profile political leader of the country, and if he were seen as moving away from Abenomics, there might be a furore in the country. It looks like that Ueda is the right man because he seems to carry the professorial circumspection even when he follows a certain path. He is being described as being neither a hawk nor an owl, but Al owl, who weighs his decision. The central bank has to push inflation to two per cent in order to drive the economy, and the interest rates have to be calibrated accordingly.

Since 2000 Japan has slipped from the second largest economy in the world to the third position, and China has replaced Japan in the second position. The challenge is to put Japanese economy on the growth trajectory through rising wages and prices which would in turn push up inflation to two per cent. It is common wisdom that zero inflation is bad for the economy as much as unsustainably high inflation. The central banks all over the world, especially in the United States, the United Kingdom, and the European Union, are battling to contain inflation and crisis of cost of living arising out of it, while Japan is desperately fighting deflation.

The Japanese economic malaise of the last three decades remains a mystery because it remains in the third position in terms of the size of the GDP after the United States and China. It is possible that Japan’s economic ranking may fall further in the next decade if India were to touch the $5trillion economy, overtaking Japan in the third position and Germany in the fourth position.

It appears that Japan faces several challenges. It has the problem of an ageing population. Its population remains around 120 million. And it does not have an immigration policy to strengthen its work force and also to increase its consumption. There are no simple answers to these questions. It is not going to be easy for Japan to open its doors to immigrants because Japan is a physically small country and it cannot cope with an explosion in population. Australia and the United States can take in immigrants but not Britain and Japan. Robotisation in industrial production is indeed the answer and Japan is moving in a big way on this front. But the country still needs more innovative responses to get out of the decades-old economic trough.