By Leika Kihara

TOKYO (Reuters)

The fading shadow of reflationists in the Bank of Japan and the latest addition to the board of an academic favoring an end to ultra-low interest rates will likely bring the central bank’s thinking closer to global peers taking a more conventional approach on monetary policy.

A Shift in the Board

Newcomer Junko Koeda, a 49-year-old academic known as a fiscal and monetary hawk, is likely to reinforce the shift towards higher interest rates and bring fresh thinking into a central bank long focused on reflating growth via huge stimulus.

As the BOJ eyes further rate hikes, academic-turned Governor Kazuo Ueda will see a like-minded ally in Koeda, an economics professor with a Ph.D. from UCLA and a knack for quantitative analysis on the effects of monetary policy.

She would replace one of the “reflationists,” or advocates of aggressive monetary easing, who dominated the nine-member board during Governor Haruhiko Kuroda’s decade-long experiment that began in 2013 to fire up inflation to its 2% target.

Board Dynamics

The departure of Seiji Adachi in March will leave just one reflationist, Asahi Noguchi, on the board. With inflation above the BOJ’s target for nearly three years, both have voted for raising rates in January.

The disappearing reflationists, along with the scheduled departure of another dovish member Toyoaki Nakamura in June, will tip the board increasingly in favor of steady rate hikes, analysts say. This also symbolizes how the BOJ is shifting away from unconventional policy toward a conventional central banking style of moving short-term rates in alignment with economic developments.

Expert Insights

“While Koeda may be balanced on monetary policy, the departure of reflationist-minded members will steer the BOJ further toward policy normalization,” said former BOJ board member Takahide Kiuchi.

“The appointment of someone like Koeda meshes with Ueda’s goal of reverting to the conventional style of using short-term rates as the sole tool in guiding monetary policy,” Kiuchi added.

Balance Sheet Challenges

The BOJ ended negative interest rates and remnants of Kuroda’s radical stimulus last year. While it has moved short-term rates up to 0.5%, it is still burdened with huge asset holdings and is tapering bond purchases slowly.

With her expertise in monetary policy analysis, Koeda may deepen the board’s debate on how far the BOJ can raise short-term rates and at what pace it can shrink its large balance sheet, analysts say.

Having served as a visiting scholar at a BOJ think tank from 2017 to 2018, she is familiar with the central bank. She has warned against the demerits of prolonged monetary easing, such as eroding fiscal discipline and keeping unprofitable firms alive.

In a model-based analysis from 2018, she argued that ending negative interest rates could stimulate the economy rather than hurt it, stating that raising rates before inflation hits 2% wouldn’t necessarily cool growth.

Recommendations

As a panel member advising the finance ministry on debt management, Koeda has called for using more sophisticated methods to analyze the risk of a spike in bond yields that could increase the cost of funding Japan’s massive debt.

“The board reshuffle highlights how the BOJ is shifting from defeating deflation to tackling problems caused by its decade-long stimulus, such as shrinking its enormous balance sheet,” said former BOJ official Nobuyasu Atago.

“That’s a problem many other central banks face. The BOJ needs to engage with them and align with global standards. From this standpoint, Koeda’s appointment makes perfect sense.”