Bank Of Japan’s Next $5 Trillion Man Has Worst Job In Economics

As poisoned-chalice jobs go, leading the Bank of Japan is a real standout. In fact, Kazuo Ueda just nabbed what’s arguably the worst job in economics.

Ueda seems a wise, if unexpected, choice by Prime Minister Fumio Kishida. The Massachusetts Institute of Technology-trained economist was nowhere on lists of possibilities to replace Haruhiko Kuroda, who retires in April. He’s a former BOJ official who served from 2008 to 20015.

One reason why: Kishida’s first choice said no. Masayoshi Amamiya, the deputy BOJ governor, knew better than to take a gig requiring him to unwind roughly 23 years of quantitative easing. And reducing a $5 trillion dollar balance sheet the size of Japan’s economy without crashing it.

Kuroda could’ve set the stage for an exit from negative interest rates. After a decade at the controls, he retains great political clout and a higher degree of autonomy than most predecessors. Yet even Kuroda has demurred.

On December 20, Kuroda hinted the BOJ might start playing the globe’s most precarious game of Jenga. This popular board game based on dismantling a tower constructed of 54 blocks aptly analogizes the BOJ’s challenge. The dangers posed by just one false move.

On that day, Kuroda touched one of those blocks to test whether the monetary tower the BOJ built might become unstable. He did it by letting the 10-year bond yield trade as high as 0.5%, the slightest of tweaks. The violent reaction in global markets—and a surging yen—had Kuroda stepping away from the game.

In the days and weeks that followed, Kuroda & Co. made sizable unscheduled bond purchases to let markets know that the BOJ’s Jenga match was on hold.

It now falls to Ueda to figure out how to retrieve blocks without sparking a global panic. Really, good luck with that.

Since the BOJ cut rates to zero in 1999, a first for a major central bank, Tokyo has become the biggest creditor government. After the BOJ pioneered QE in 2000 and 2001, the yen became the ATM of global finance.

Borrowing cheaply in Tokyo and carrying those funds into higher-yielding assets in New York, London, São Paulo, Johannesburg, Mumbai, Bangkok and beyond become the special sauce of global speculation. This explains why sudden yen gyrations tend to blow up a hedge fund or two.

Switching off this ATM might hobble global markets. So Ueda’s strategy, if he has the courage, will be to limit its hours of operations and rationing withdrawals.

Then Ueda also has 126 million Japanese with whom to contend. Japan Inc. takes free money for granted. Banks, companies, pension funds, endowments and a government servicing the worst debt burden in the developed world will be in a bad way if Ueda drains the proverbial punchbowl.

Paul Volcker, the 1970s-1980s Federal Reserve chairman, literally got death threats for hiking rates. Imagine the blowback that might come Ueda’s way if he sets out to end the two decade liquidity gravy train in the No. 3 economy.

In other words, Ueda will need to hunker down, switch off the television and social media feeds, and withstand the heat at home and abroad to get Japan Inc. clean and sober. Does he have the moxie? Only Ueda knows.

But let’s not forget the political empire that’s ready to strike back if the BOJ took its “independence” too far.

Start with Kishida’s dismal approval ratings. They’re in the mid-20, which usually means a government has reached its sell-by date. Surely, Kishida worries that the BOJ normalizing rates now might further damage his economic legacy.

Add in the fact that the powerful Ministry of Finance has a seat in the room when BOJ officials deliberate rate decisions. This would be unthinkable for the Fed.

So is what happened on December 20, as Team Kuroda mulled a modest adjustment to bond yield policies. That day, government officials on hand asked for, and were granted, a half-hour break to consult their ministries.

That, remember, was only an incremental tweak. Just imagine the panic in government circles if Ueda tried to enact a formal tightening move. Again, good luck with that at a moment when Japan is barely growing—by an annualized 0.6% in October-December period—and wages remain stagnant.

There’s a way out, of course. The inflation Japan is getting is more about supply chain troubles and Vladimir Putin’s Ukraine invasion than Kuroda’s policies. As such, the BOJ needs to strategize carefully. It also must coordinate with the government in news ways.

For 25 years now, cooperation has meant monetary and fiscal loosening. What’s needed now is for lawmakers to do their job and raise Japan’s competitive game. Ueda should make ATM access contingent on steps to loosen labor markets, cut bureaucracy, incentivize innovation, support startups and empower women.

If the prime minister who hired Kuroda in 2013, the late Shinzo Abe, had implemented any of these reforms, Japan might’ve kicked its QE habit by now. Instead, the addiction to free money worsened.

It now falls to Ueda to take risks the BOJ has avoided for far too long. Only he knows which of the Jenga blocks he’ll try to remove first. All markets can do is hope things don’t come crashing down.