Exiting ultra-loose policy is serious challenge

Bank of Japan (BoJ) Governor Kazuo Ueda is back on the wires on Thursday, noting that “when we normalize short-term interest rates, we’ll have to be careful about what will happen to financial institutions, borrowers of money and aggregate demand.”

Ueda added that “it is going to be a serious challenge for us.”

Additional quotes

It’s too early to determine what we specifically can do when we normalize our policy stance.

If we don’t manage the process of phasing out YCC properly, we can cause huge volatility in the bonds market.

We hope to be able to exit from this approach without creating such volatility, but we will see.

We want exchange rates to follow fundamentals, we will of course analyse carefully how exchange rates would affect inflation and output.

We are concerned about many things including what will happen to the US economy, when asked about key concerns regarding prospects for achieving BoJ’s target.

Base line assumption now is that the US economy will achieve some version of soft landing, but there are risks on both sides which, if materialize, will affect Japan .

We also worry about what will happen to the chinese economy, such as possible spillovers of property sector to rest of its economy.

I’m sure they have learnt a lot from our experience, when asked what China can learn from Japan’s past episode of deflation.

Scale of problem relative to GDP is smaller for China now than was the case in Japan 30 years ago, but they face serious challenges ahead.

We are very interested in what will happen in Japan’s next round of wage negotiations in spring.

We have to proceed fairly carefully because everybody is used to environment of low interest rate, when asked about effect of future rate hike on Japan’s economy.

Market reaction

USD/JPY is holding higher ground just above 151.00, shrugging off the slightly hawkish comments from the BoJ governor. The pair is trading modestly flat on the day, as of writing.