Mark Farrington has been covering the Bank of Japan since he finished colleage and moved to Tokyo in the mid-1980’s to work in financial markets. “An early globalist, formative years in Asia, first foreign BoJ Watcher, 35 years in global financial markets, political scientist, early tech adopter, builder of thought-leadership teams,” is how he explains his work. “Providing commentary through an experienced observer’s lens.”
To provide some perspective for those who have never covered one of the most powerful central banks in the world this means that he has been watching the Bank of Japan navigate through the the real estate and stock markets crash of the mid-1980’s, the deflation of the 1990’s, the extraordinary stimulus Haruhiko Kuroda engineered starting in 2013 over the long decade that has led to the current policy normalization path current governor Kazuo Ueda must follow now.
Mark continues to analyze the BOJ and all the forces driving it as the author and founder of BOJ Watchtower on Substack. This as Japan’s new prime minister, Sanae Takaichi takes over and hits the policy ground running barely one month after she was elected and is already putting in place the biggest supplementary fiscal package Japan has had since Covid. There are now three of Ueda’s board members who are opening the door wider to a rate hike in December as inflation stays well about the BOJ’s target.
Here’s one very big rub for the Ueda and his team. Taikaichi, who was a protogee of Japan’s most powerful postwar leader, Shinzo Abe is trying to rev up Japan’s economy and has made it clear she is not a fan of rate hikes. Yet, the BOJ intends to bring down inflation. While she has softened that position, given Japan’s system of monetary and fiscal governance this new P.M. is expected to exert policy forcefulness over the BOJ leading many to wonder how hard the BOJ will be able to push on its own.
Mark sees Takaichi resurrecting the landmark policy of her onetime protoge Shinzo Abe, known to be Japan’s most powerful prime miniser of the postwar period. She has taken his Three Arrows of growth - monetary, fiscal, and industrial policy - and rebranded them as her Three Pillars… but that may be doomed to fail.
”A potential failure,is that…it hits the market at a time when everyone is worried about limited fiscal space, when everyone is concerned about the BOJ being so far behind the curve, and with inflation continuing to overshoot the target for almost four years now,” he says. “So the market’s not in the mood for the first two of Abe’s arrows, and it wasn’t made very clear by Takaichi that she’s going to pay respect to that.”
As for a rate hike at the BOJ’s December meeting, forces may be building. “We’ve had two meetings back-to-back with two dissenters. And that’s never happened in history for the BOJ. I mean, at least two dissenters for tightening,” Mark observes.
So dive in hear what he has to say about Takaichi’s programs and the officials she has appointed to help get them passed into law. Signals from the BOJ to watch for ahead of its December meeting. And get an important history lesson on “what the BOJ was like through the 1980s and 1990s, up until the revision of the Bank of Japan law in
1997.”
Takaichi’s pillars 00:02:10.910
I guess Takaichi’s friends or inner circle would be, you know, congratulating her on, resurrecting Abe Economics in her new form, because they pushed through a very large supplementary budget, and she’s, updated all of the organizations that Abe had created to help him implement the three arrows. So she’s rebranded it as the Three Pillars, but it’s essentially, you know, focusing on this industrial policy, third arrow, that Abe didn’t have a chance to finish. And, she’s got to work on that straight away, so I think she would be happy with that as an achievement. As a potential failure, is that, you know, it hits the market at a time when everyone is worried about limited fiscal space, when everyone is concerned about the BOJ being so far behind the curve, on inflation, you know. continuing to overshoot the target for almost 4 years now. So, the market’s not in the mood for the first two of Abe’s arrows, (easy monetary policy, robust fiscal policy and ‘industrial policy’ a boost to private investment) and it wasn’t made very clear by Takeichi that she’s going to pay respect to that.
Fiscal stimulus looks too big 00:03:49.760
Yeah, it’s definitely too big, in my opinion, and I think the markets sent that message back as well. As you mentioned, bond yields up to new highs, 3.4%, on the 30-year, and the 10-year at 1.8%, you know, Japanese yields are now above Chinese yields, you know. Japan is not the low yielder in Asia anymore. And even the stock market is down 7-8% since earlier in the month, so the market considers it to be too big, in my opinion. It’s the largest supplementary budget since COVID. And so you have to ask yourself, with corporate profits at historical highs, and the Nikkei at historical highs, and GDP more or less on trend. You know, why do you need the larger supplementary budget since, since COVID? So I think that’s been the feedback to it. And, you’re right, she doesn’t… even with the coalition, they don’t exactly control, both, lower and upper branches of Parliament, so there will be pushback by the opposition, and hopefully it will be streamlined.
A question of flexibility 00:04:56.850
The budget started out at about $65 billion, and then ended up doubling in the course of a week after a series of meetings. So, you know, reducing it by 10-20% would be taken positively by the market, and also potentially show the rest of the parliamentary opposition parties that Takaichi can work with them.
Shifting views freeze policy response 00:06:02.740
So, the case for rate hikes was pretty much in place in September, in advance of the September meeting, and we even all reacted to Governor Waller’s, speech that he gave at Jackson Hole, where he was… Emphasizing that the labor shortage is actually now a source of inflation, regardless of the pace of growth. And also, the IMF had revised up growth, and most people who had overreacted and reduced their growth forecasts in the April-June quarter following the tariff shock, they had all, you know, reversed their forecasts and taken that little dip in demand out of the forecast. So, inflation had been revised up, and growth had been corrected since Q2.
BOJ dissent is telling 00:06:50.390
We’ve had two meetings back-to-back with two dissenters. And that’s never happened in history for the BOJ. I mean, at least two dissenters for tightening. There have been dissents for easing back in the early days before QE, but in terms of tightening, it hasn’t happened. So, that should have carried more weight.
Rate hike votes are stacking up 00:07:14.240
Ueda didn’t exactly give enough airtime to that, in my opinion, in his press conference after the October meeting. And also, as we’ve seen a third board member this week give a speech, Koeda, the newly appointed board member in April, she has made it very clear that she’s willing to vote for a rate hike in December. So now we have potentially three board members on record to raise, and yet Ueda’s not signaling, which is what the market is waiting for.
BOJ communication has been an issue 00:08:27.920
Well, I actually picked up the change in tone and confidence level, from last year in September, where…the BOJ had to do some recovery after the rate hike at the end of July that led to the big stock market sell-off in early August last year, and they were criticized for having not, you know, telecasted that and communicated well. And so, Ueda and other BOJ officials were out on the wire, saying, yes, we can do a better job of communicating, we’ll focus on that in the future. They were in a position to raise rates again in October, and then a new prime minister came along in October last year as well, and signaled that now is not a good time for a rate hike, and I think that really took the wind out of Ueda’s leadership, and he has been very differential and very indecisive since. We stumbled over the rate hike last year, should have been in December, but got kicked into January again out of this micromanagement from the Cabinet Office. So, I think Ueda has not recovered from that, and perhaps understands that his role has become much more of a liaison and a bridge to the Cabinet Office. rather than, say, chief economist and chief thought leader for the BOJ. And so, I think you’re seeing the deputy governors and the board members being allowed to speak truly as a central banker, and Ueda is putting his politician’s hat on when he speaks now, and being careful not to say the wrong thing.
BOJ Reform…or at least changes 00:10:40.510
That’s a fantastic topic. I think that’s the topic that has motivated me to write a lot about the BOJ this year, because I find it fascinating. And I think the right framework to have it, as an analyst or a mock participant, is to understand what the BOJ was like through the 80s and 90s, up until the revision of the Bank of Japan law in 1997, under then-Prime Minister Hashimoto, who was, you know, launching a kind of Big Bang financial reform following the banking crisis that they had in Japan and the Asian financial crisis in his region. And one of the, you know, signature pieces of the reform was the Bank of Japan law, which was aimed at liberating the Bank of Japan from the Ministry of Finance, not from the Cabinet, because the BOJ was always under the thumb of the Minister of Finance, and the Minister of Finance caught a lot more, criticism for the bubble economy and the lost decade than the BOJ did at that time, and it was thought that if only the BOJ could be liberated from the Minister of Finance, it would be, able to lead the country out of deflation, etc.
BOJ reform path altered by crisis response 00:11:51.380
So, that was a very important revision, and it did allow this broad, diversified monetary policy board that we have now, and you do… and you did see the BOJ begin to converge a lot more to the global standard for G10 central banks, but then, of course. what really happened was that the global financial crisis came, with Japan slipping into deflation or negative rates, and then this big need for reflation that came under Prime Minister Abe, and the appointment of Kuroda as the governor of the BOJ. That sort of 10-year period where Abe Economics and the three arrows were being promoted, and Kuroda as the governor. completely altered everything that was meant to be achieved by that revision of the BOJ law back in 1997, and this convergence toward a global best standard, if you can use that term for global central banking, was interrupted.
BOJ transitions toward a global central banking standard 00:12:47.580
So, with Kuroda, you know, retiring and ending his term in 2023, Ueda being onboarded and given the mandate to normalize and put a line under that period, we are slowly, incrementally working our way back towards the normalization of the central bank, including its autonomy and independence that were enshrined in that, you know, Article III revision in 1997. We’re just not there yet, so it’s unbelievably confusing, because we’re working in that direction, and while the BOJ managed to liberate itself from the Minister of Finance back in 1998, it got put under the thumb of the Cabinet Office during the Prime Minister Abe era, and so with Takeichi coming back. a lot of the same people are around her, and a lot of the same ideas are shared, they still view the BOJ in a subordinate role that should be toeing the party line and collaborating with the policy intentions. of the Cabinet Office, rather than running an independent, autonomous monetary policy. And that’s the dilemma we’re faced with right now.
Mild mannered Ueda unlikely to reset BOJ 00:14:27.190
Well, if you had an extremely strong, sort of stubborn character as the BOJ governor, you would be seeing a lot of verbal pushback from him, but that’s not Ueda’s style. You know, he’s soft-spoken, you know, an academic intellect who prefers to do his work quietly in the office, not in front of the camera or pounding the table in meetings. So, it’s not likely to come from him. The BOJ has the legal, argument on its side, so if push came to shove, it really could resist, and it would be upheld, in terms of legal interpretation. So, I’m looking to members around Takeichi, to offer a balanced view, view form the members of her cabinet.
Takaichi forms advisory groups 00:15:14.510
Kiyuchi, who’s the head of the Japan Growth Strategy Group that she created. This is this evolution, again, from Prime Minister Abe’s, you know, Japan rejuvenation group that he had created. So she’s called the Japan Growth Strategy. It’s a coordinating body, it sits alongside the, you know, the CFEFP, which is a Council for Economic and Fiscal Policy, and for those who don’t know what these groups do, imagine, like, the Council of Economic Advisors in the US and the National Economic Council combined together. making the policy advisory and recommendations to the cabinet Office, to the executive office. That’s their role, but in Japan, it’s less of a research role and more of a coordination role.
Kiyuchi needs to step up to control various interests 00:16:12.220
So, Kiyuchi is the key guy who’s chairing these two councils and coordinating all the input, and then also coordinating the implementation of the policy. So, this is where the supplementary budget that was first floated by Takeichi and Katayama and the finance minister, as $65 billion suddenly grew into $135. It got into that meeting format, and all of the stakeholders in that meeting were like well, what about this? What about that? What about this? And so, Kiyuchi’s the one, I think, who really needs to exercise the control and authority and help Takaichi to control all these different stakeholders that she’s invited to be involved in the decision-making.
Faith in Ueda 00:18:00.450
I’m putting faith in Ueda. I would say… I’ve known Ueda for a long time, particularly during his first term as a monetary policy board member back in the, sort of, 1998-2005 period, where he was the architect of the QE strategy and a lot of these intellectual leaps that the Bank of Japan needed to make. He’s quiet and diligent and convincing over time, so I think, he will… he’s playing his role, which, when he attends these coordination meetings with the Cabinet Office, he’s essentially the country’s chief economist. His job is to tell them This is the state of the economy. His job is not to tell them what policies to do. So he’s there. When anybody has a question about inflation or growth outlooks or risk from America, then they turn to Ueda and say, please, what do you think? So that’s his role and his purpose for being there. But what he needs to do, then, is to quietly explain each time he’s called upon to speak to all of the politicians and bureaucrats, that you will have a much better chance of getting what you want, which is fiscal stimulus, innovation, industrial policy and reform, if you don’t blow up the financial markets, you know? And that the way to do that is modest fiscal spending…
Japan has low sovereign rating 00:19:23.370
Japan already has the lowest sovereign rating within the G10, and the yield curve… I mean, 30-year yields, are not just high, they’ve been selling off every year…now weaker every day for 11 days in a row. So he needs to warn them that, you know, this can get out of control. And so, let us anchor inflation, let us anchor the yield curve, and let us anchor inflation expectations by normalizing, and that will have absolutely nothing, negative to impact your strategy on industrial policy. So, this message needs to be communicated because there’s too much of this old thinking where Abe’s thesis was, you need monetary policy, fiscal policy, and industrial policy all pushing on the accelerator at the same time in order to get an outcome. Now the message has to be <changed!>…We’re neutral on monetary and fiscal policy, and all of the acceleration is on industrial policy and reform. And that message is not yet clear amongst the Cabinet.
Who Takaichi will trust 00:20:47.000
Yes, I think she needs to believe it, and she might be one of the first. I think she trusts Katayama, the finance minister, very much. You know, she promoted her and put her in this position as the first woman finance minister along with her. They were both young prodigies under Abe together, and so they’ve kind of come up together, and I think she’s counting on her t I also think, some of the, the big… the big picture, leadership roles, like Kyuchi, who’s coordinating body, he needs to get that point, for sure.
Reality spoils confidence 00:21:31.210 –
All new presidents or prime ministers are overconfident until they get massive pushback. We saw that with the Trump administration. After Liberation Day, the markets gave them a proper whacking, and then suddenly, some of the louder voices from Trump’s administration were missing, and Treasury Secretary, Bissent, was out in front speaking and soothing the markets.
Baptism of New PM by fire- 00:21:54.630
We’re going to have that same response with Takaichi, not only in the finance area, but you see already in foreign policy area, with the comments about Taiwan, etc. So, you know, it’s baptism by fire when you’re put into the office as a prime minister, and she will learn, and she will adjust.
China makes a big mistake or two 00:22:42.730
Well, I have to say, like, this year, 2025 might go down in history as one of the worst years for China policy execution. We were using the term, you know, own goal when China, announced all the export controls on critical minerals, because that just pushed the world into consensus on the risks of dependency, and completely supported the Trump administration’s view, and I think, earlier in the year, the efforts to sort of wrestle control of the Global South from, you know, India and Brazil and other members like that, and catering too much to the Russian message in BRICS, led to subdivisions within BRICS. And then now, this… the way they’re responding to Japan and Takaichi’s comments, I think, is also another own goal…
Japan has immigration issues- 00:23:29.290
There’s a backlash against excessive immigration in Japan right now… already. The fact that the Chinese are going to voluntarily cut their quota will be only cheered on the streets.. But I think, offering to put back the seafood imports and then cancel them, that’s going to have a negative effect. I’ve seen a lot of comments from businessmen saying, we’re just not even going to try anymore. I mean, China is just too unpredictable and unreliable as a trading partner. We can’t build our business strategy around them. Now, interesting, that’s the kind of criticism that everybody likes to make about Trump.
China becomes undependable …00:24:09.100 –
But this is what the Japanese are saying about China. You know, we cannot safely build a business strategy around China anymore because they’re just too unpredictable.
A need for temperance for the new administration 00:25:26.400
And so I actually think Takaichi just has to weather the storm. I would flag that I consider that mistake that she made, as evidence that there are too many powerful voices in her cabinet at the moment which need to be dialed down, because it looks very much like it was, you know, Kiyhara, her cabinet secretary, would have been pushing this line of speaking as an extreme, you know, ultra, ultra-right hawk within her cabinet, but someone she relies on and depends on very much. He needs to be dialed down in terms of his language, and it will then trickle down to her dialing down her language. And I think the same will happen on the economic side. If those around her say, we really need to pay respect to the markets, and dial down the tone on the fiscal side, easing fiscal policy, then she will start to replicate that language. So, I don’t blame her specifically. I think it’s like the echo chamber she’s in.
Inflation language has not been the best 00:25:54.870
Well, the language that they’ve been using is this, you know, underlying inflation being sustainably above 2%. So, they haven’t… surprisingly used risk management language, like fears of inflation expectation being unanchored, or concerns of the volatility in the financial markets, or weakness of the yen. The type of risk management flags, which are really flashing red hot, that they should be talking about. Instead, they’ve been really sort of monotone on the underlying inflation trend. So, I think that it’ll be as simple as Ueda just saying, we now have enough data to confirm that the underlying inflation trend will now be sustainably above 2%. We’ll also, get a revised… a revision up… in the growth forecast for this year as a result of the supplementary budget. It’s 3% of GDP. It’s a big boost to growth.
Growth metrics keep improving 00:26:52.130
And as I mentioned, already they’ve revised up the weakness that they had expected from the tariff shop, which never happened. So, the growth forecast has doubled since April already. And so now, they could revise GDP up to be 1%, 1.2%, which would be above trend.
Growth and inflation are well-expected 00:27:11.820
And so, acknowledging that, growth is above trend, and therefore we have a higher confidence that, inflation will… be above 2%. The wage growth story is really kind of already out there. You know, they’ve been saying that they feel very confident that wage growth will be 5% in the spring negotiations round, so that wouldn’t be any new news, so it’s just these other two areas, growth and underlying inflation that they could correct.
Reference for intervention; US cooperation makes sense… 00:32:39.630
Yeah, so I’ve been writing about it the last few weeks, because I do think the risk of intervention has risen, and in fact, I think it makes sense, for once. And actually, it makes sense for the U.S. to help lead on it, or at least be willing to do coordinated bilateral intervention with the Ministry of Finance, because slowing down the weaker currency gives more time for the BOJ to normalize rates. It will take away some of the volatility at the long end of the yield curve, and it will let the market know that there is a bit of a backstop there. The backstop has moved from 145 in 2003 up to 1, you know, 155…. 160 in the last year, but there’s still an approximate backstop there, and I really think it’s important to let the market know that that’s it. That ‘Japan’ really doesn’t want to see dollar-yen go above that level.
Mark Farrington
Portfolio Manager, Global Macro & Geopolitical Strategist. Writing on Financial Markets, Central Banks, Currencies, Japan, and geopolitics.
Experienced Managing Director, Portfolio Manager, Strategic Advisor with a demonstrated history of delivering strong financial returns and building investment teams. Skilled in Asset Management, Absolute Return, Currencies, Trading, International Relations, Geopolitical risk analysis and Strategic Advisory. 35 years of global experience, including 17 years in Asia and a Master’s Degree in International Relations from London School of Economics and Political Science. 25 years of volunteer work in non-profit sector, part of PRI working group that wrote ESG guidelines for Macro Hedge Funds. Extensive focus on digital currency evolution and DeFi transformation.
