Bank Of Japan's Silence On US Fed Threat Should Worry Us All

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Yet Trump's assault on the Fed is the defining central bank risk of our time. Never before in the Fed's 113-year history has a US leader gone after America's most respected global institution with such intensity.

That's despite the Fed's key role in protecting the value of the reserve currency and US Treasury securities. The BOJ is making a grave mistake by staying on the sidelines.

“This logic is flawed,” Kumiharu Shigehara, a former chief BOJ economist, writes in a Japan Times op-e.“Central bank independence doesn't mean freedom from explanation. It means delegated discretion - the authority to make policy decisions insulated from day-to-day political pressure. That delegation is sustainable only if the institution explains how it uses its discretion, what assumptions underpin its decisions and where uncertainty lies.”

The BOJ could indeed be next in the line of political fire. Japan's central bank has technically been independent since 1998. But it's arguably never had the distance from political influence that the Fed had long enjoyed. Or that of the German Bundesbank of old - the institution after which the European Central Bank is modeled.

The BOJ cut rates to zero in 1999, where they've effectively been ever since. No truly autonomous central bank would ever hold rates near zero - or even negative - for 26-plus years while cornering the government bond market and becoming the biggest owner of Tokyo stocks.

In 2018, the BOJ's balance sheet was so larded with bonds and stocks that it topped the size of Japan's US$4.2 trillion. It was a first for a Group of Seven central bank and suggests that, as an institution, the BOJ remains“captured” by political forces.

Enter Prime Minister Sanae Takaichi, whose Liberal Democratic Party (LDP) is holding a snap election on Feb. 8. Since taking office on Oct. 21, Takaichi has made it clear her entire economic strategy is based on the BOJ holding rates ultralow and the yen remaining weak.

In early October, before she won the premiership, Takaichi rattled markets by saying that“the government must be responsible for fiscal and monetary policy. The BOJ will then consider the most appropriate means.”

Such views fly in the face of Ueda's effort to normalize rates. In December, for example, the Ueda BOJ raised short-term rates to 0.75%, the highest since 1995. Yet the BOJ appears to be on hold indefinitely, partly because the political environment has turned firmly against raising rates.

There's little indication that Team Takaichi would try to fire Ueda. But the BOJ drama instigated by Takaichi's mentor Shinzo Abe in 2012 and 2013 is a cautionary tale.

At the time, Prime Minister Abe was fed up with then-BOJ Governor Masaaki Shirakawa's“too cautious” approach toward rate cuts. Abe put the moves on the BOJ to provide“unlimited” monetary easing. While less acerbic than Trump, Abe's BOJ jawboning left the Tokyo establishment aghast.

“I want respect for the BOJ's independence as it's doing its utmost to conduct appropriate monetary policy,” Shirakawa told reporters in late 2012.

In 2023, local Japanese media reported on documents detailing discussions from the Abe era. Turns out, the BOJ endured quite a struggle with the LDP to maintain its independence, as the LDP angled for lower rates.

At the time, the Asahi newspaper quoted then-Deputy BOJ Governor Hirohide Yamaguchi as saying Abe's strategy“underlines the government's firm intention to essentially delegate the implementation of monetary easing steps to the BOJ.”

Since Takaichi hails from the“Abenomics” wing of the LDP, it's fair to worry that Ueda's days of having latitude to make controversial rate decisions are numbered. In November, Takaichi's economic plan stressed it's“extremely important” for monetary policy to focus on achieving strong economic growth.

On November 9, 19 days into her premiership, Takaichi said:“I hope the BOJ guides appropriate monetary policy to stably and sustainably achieve 2% inflation driven not by cost-push factors, but wage increases.”

All this“is a huge threat for the BOJ as her remarks show she has little respect for central bank independence,” says former BOJ board member Takahide Kiuchi.“It's quite likely she will interfere in monetary policy and try to keep rate hikes in check. I'm sure people at the BOJ are very alarmed.”

What's more, Kiuchi warns,“the BOJ is not immune to the kind of things happening with the Fed. Although not as explicit as the way Trump intervenes, Takaichi has and could make a lot of requests (about) what the BOJ ought to do.”

The missing link, of course, is productivity growth. If Takaichi wants the BOJ to stop hiking rates – or perhaps even raise them – her team needs to act boldly to reduce bureaucracy, modernize labor markets, catalyze innovation and welcome greater disruption to increase worker efficiency.