The Repeated Failures of the Bank of Japan and the Details of Governor Ueda’s Shocking Remarks

BOJ Governor Kazuo Ueda’s press conference stunned the market.

On August 5, the Nikkei Stock Average fell 4,451.28 yen, the largest drop on record, surpassing the drop recorded on the day after Black Monday in 1987, and more than 10,000 yen from its high on July 11, leading to global stock market declines. The main cause of this drop was the Bank of Japan’s interest rate hike, but it was BOJ Governor Kazuo Ueda’s press conference that stunned the market. An expert explains.

What was BOJ Governor Ueda’s “astonishing statement”?

At the monetary policy meeting held at the end of July, the BOJ raised its policy rate from 0-0.1% to 0.25%. The timing of the rate hike itself was unexpected by the financial markets, but the real surprise came from Governor Ueda’s remarks at the post-meeting press conference. He said , “If the BOJ’s economic and price outlook is realized, we will continue to raise the policy rate accordingly.

Why is this a “problematic statement”?　It becomes clear when you read the BOJ’s Economic and Price Outlook. At the same time as the press conference, the BOJ released its “Outlook for Economic Activity and Prices (July 2012). In the document, “Policy Board Members’ Outlook for Fiscal Years 2024-2026,” the Bank of Japan’s policy board members’ forecasts for real GDP and the CPI (year-on-year) are listed.

The median real GDP forecast is +0.6% for FY24, +1.0% for FY25, and +1.0% for FY26. The consumer price index is +2.5% for FY 2012, +2.1% for FY 2013, and +1.9% for FY 2014. These projected values are not particularly unusual. The economic forecasts of major think tanks are similar to each other. However, this raises a major question: Why are they so completely “hawkish”?

Governor Ueda’s “hawkish” shift will lead to policy rate “to 1% at the end of next year

The reason is that Ueda’s statement above is a declaration that “if the Japanese economy continues to perform according to this average forecast, we will continue to raise interest rates. The hurdle for triggering a rate hike has become extremely low. Moreover, the statement also says that it does not consider the 0.5% policy rate, a level that has not been exceeded for the past 30 years, to be a “barrier.

The monetary policy authority’s advance statement of future monetary policy policy is called “forward guidance,” and it can be said that the Bank of Japan has issued an outrageous forward guidance.

As a result, the stock and bond markets were forced to make major revisions to their interest rate forecasts. The current scenario calls for two or three 0.25% rate hikes by the end of 2013, with two hikes bringing the policy rate to 0.75% and three hikes to 1%.

Monetary policy makers who are aggressive in easing monetary policy are sometimes called “doves” and those who are aggressive in tightening monetary policy are called “hawks. Governor Ueda, who had been perceived by the market as a hawk, appears to have turned into a full-fledged hawk.