Masazumi Wakatabe served as Deputy Governor of the Bank of Japan from 2018 to 2023. He was at Haruhiko Kuroda’s side in the former Fed governor’s second term as the policy of extraordinary monetary stimulus which the BOJ had implemented, and then started winding down, opened the door to normalization which his successor Kazuho Ueda continues to pursue as 2025 draws to a close.
To understand all the forces driving the BOJ’s policy at this point in time, it’s important to step back and remember that Kuroda was appointed BOJ governor in 2013 by Shinzo Abe, regarded as Japan’s most powerful prime minister of the postwar period, to take whatever steps necessary to end to end deflation and get growth back on a stronger path with extraordinary stimulus at its core.
Now one of the biggest forces driving Japan and hanging over the BOJ’s policy path is the election of Abe’s protege, Sanae Takaichi. She has been an advocate of boosting growth with strong fiscal spending, and in the past warned the BOJ against raising rates. She has pulled back from these earlier policy positions but still is expected to call for more government spending and to keep signaling to the BOJ that rate hikes should be few and very far between, and perhaps even delayed.
Enter Professor Wakatabe. He first joined the Faculty of Political Science and Economics at Waseda University back in 2005, left to serve as BOK Deputy governor and is back teaching economics there again. When I ask him about the impact Takaichi is having now now and is likely to have in the months ahead, he notes that she is “is hugely popular” with an “unprecedented” 70% approval rating.
Importantly, Wakatabe says the new prime minister has come into office with the public in favor of her economic policy agenda which is now being called “Sanaeonomics.” He describes this to an extent as “ a kind of continuation, and also a kind of improvement on…Abenomics.” On the growth strategy of this, he says “Abenomics has done a lot…but we still haven’t yet gotten into the…growth trajectory.”
When it comes to the BOJ, will Takaichi therefore put pressure on officials not to hike rates? After all in 2024 he notes that she said it publicly it would be foolish for the central bank to raise rates. For now, he notes that the prime minister has been more cautious on monetary policy and takes this as a signal she won’t “meddle with specific decisions.
So what will the BOJ do? Why and when will it hike rates?
Wakatabe starts by noting that he has been seen forecasting a possible rate cut in October but no longer is, first because is the political factor of the recent election and then also because of the impact of and uncertainty of the U.S.-China trade war.
In addition, he points out that while headline inflation is now up to 2.9% suggesting inflation may still be accelerating “the so-called U.S. core definition” that takes out food and energy is down to 1.3% and while there may be many reasons for that including rising food prices “you can actually make a case for waiting…for <an>interest rate hike.”
”My view is that the BOJ needs a really strong reason to hike interest rates in December,” or even January. And as many business economists are predictng third quarter GDP may be negative, “and the last job market data is not that reassuring, “it’s not quite clear that the Japanese economy is on a good footing.”
So dive in and hear more about what Wakatabe has to say about what to expect from Sanaecomics, why it’s not so clear now that the BOJ can sustainably achieve 2% inflation and how changes in the dollar/yen exchange rate may affect inflation.
Takaichi takes the helm and policy shifts 00:01:43.88
Central bankers never admit any political influence on the market policy decisions, and they shouldn’t. But there are several facts, I think, going around. First of all, that the new Prime Minister, Sanae Takaichi, is, hugely popular right now among the Japanese population, so her, popularity, the rating, is, kind of, unprecedented. I mean, that’s more like 70% of the Japanese people approve of his, her, her as the prime minister. So, and secondly, I think that… Takaichi, has a very, kind of a solid idea about the, the how the, the kind of policy should look like. So, we now call her, economic policy agenda as, Sanae Economics, so… So, it’s been circulated, circulating around the Japanese media, but, still, it’s not the common usage for the foreign, sort of language. But, nonetheless, that’s the, she, emphasizes the, kind of the continuation, from Abenomics…
Three legs for policy Monetary fiscal and growth 00:03:05.740
She, emphasized the importance of the, the cooperation between the government and the central bank, okay? So, economics had, three arrows, the multi-policy, fiscal policy, and, growth strategy, okay? : And, I think that the dynamics is a kind of continuation, and also a kind of improvement on, the, abenomics. Yeah, in the sense that, you know, that the dynamics were really about the first hour, the monetary policy. So, the second hour of fiscal policy, you know, that’s, the, the… after the initial expansion, expansion, the, the government actually raised consumption tax, twice, so that the, the fiscal policy has been kind of tightening. And growth strategy, I think the, the abenomics has done a lot, on that front, but, the, we still haven’t yet, gotten into the, sort of the, growth trajectory, so to speak.
Article 4 is it cooperation or Co-0ptation? 00:04:21.640
So, the GDP growth rate has been, you know, very, small. I mean, that’s kind of negligible. For the monetary policy, the new Prime Minister, Ms. Takaichi, keeps emphasizing the importance of the Article 4 of the Bank of Japan law. Article 4 stipulates that the government and the Bank of Japan should communicate with each other closely. Because the monetary policy is a part of the overall economic policy, okay? So, whenever she talks about the monetary policy, she talks about Article 4 of the Bank of Japan.
Article 3 Vs Article 4 00:05:09.110
Well, the law actually says the very abstract sense that the need for communication, between two institutions, the government and the central bank, the Bank of Japan, in this case. So, but, the, that’s, that’s, that’s interesting, because Article 3, guarantees the, the central bank independence, for the BOJ. Yeah, Article 4, gives the, the, the kind of the… context, in which monetary policy should work.
Changed from one year ago- 00:05:50.430
Last year, there was also LDP presidential election, and Mrs. Takaichi was there, and she lost at the final round of the election. During that, the, the, the presidency election debate, she actually casually mentioned that the, it, would be a fool to raise, interest rates.
Moving on in a new regime 00:07:30.030
I don’t think that the, that her stance on monetary policy, is the reason why… I think that’s the, her, broad, economic outlook, is, emphasizing on… you know, the growth. So, we’re going to have to grow. So, that’s a kind of positive message, but I think that’s the… I don’t think that the general population, really understands the sort of intricate details. But having said that, the, it’s quite intriguing that, because, she, you know, has, said, you know, it would be a fool to, raise interest rates, back in 2024, but now… she, you know, <since has become> more, sort of, cautious about her remarks about market policy. Right. So he, you know, keeps emphasizing the article for the spirit of cooperation between two institutions, but, you know, she doesn’t want to, sort of, meddle with the specific policy decisions.
I did think an October hike could be in the cards 00:10:05.130
Well, I must say that, you know, or I must confess that the, the last, you know, last conversation we had, that I didn’t want to exclude the October hike. So, that was my prediction. So, you know, I always keep two things separate, the objective…
Positive and normative factors 00:10:25.640
Let’s see, the positive question and the normative question. So, as for the positive question of whether the Big Bank of Japan is going to raise interest rates, I think that there was kind of a high, some, some probability that the BOJ moved in October. So, so that’s, that was my prediction. But then, you know, then, something happened in between. That’s the, the… from the last conversation to the now that we… the conversation we have. Okay. One is, of course, a political factor, but the other one is the, you know, that’s heightened the U.S.-China trade war, okay? So that deal… I think that <the US> has been, winning, so that’s the, now the… Prime Minister… the… President Trump claimed his victory over the China-U.S. trade deals. We are not, so sure about that, but I think that he decided to reduce the tariffs, to China. So, but I think that during two months, several things are going on, new, prime minister is elected, being elected, so the U.S. trade, China trade war is one big factor
Tougher judgement on inflation 00:11:41.900.
The normative question, you know that the inflation rate, the headline is, right now 2.9, okay? So, and it’s actually up from the 2.7, from the previous month. So, you can say that it’s still, you know, inflationary, and maybe it may be accelerating, but if you take a look at the so-called U.S. core definition of CPI. Yeah, that’s right, except for food and energy. The number actually goes down to 1.3. So the previous month, the number was 1.6. Now, we can point out several, sort of, temporary factors going on. to this, reduction in the, the, core CPI inflation rate. But, you know that if, the, the CPI, less food and, energy, is 1.3, you can actually make a case for waiting, okay, for raise, interest rate hike. So, lots of things, lots of information comes from the rise in food prices.
BOJ Cautious: deflation issues not wholly out of the picture 00:14:01.960
Partly, I think that’s the reason, that’s one of the reasons, I think, to why the governor is very cautious. But I think that’s the, they are now, discounting the fear of deflation, so that they feel more confident about the persistence of inflation. So, in that sense, you know, that they are not, worried about the another sort of failure, of the BOJ to get back to the deflation, so that the… I think they feel more confident about the, kind of inflation, going on. So… the problem is, still, you know, that you’re going to have to, you have to be careful, because, it’s still… it’s not so clear that we… the BOJ can achieve 2%. So maybe 1%, 1.5% inflation rate, sustainable. But how about 2%? It’s not a done deal, I think, so that the BOJ, especially the Governor Whitaker, is cautious about it.
The yen is an important symbol 00:17:05.160
Nonetheless, I think there is a kind of the perception among the Japanese people, and also the Japanese politicians, about the weaker yen as a kind of symbol, as the symbol of, the inflation, which people don’t like. So this is the one, I think, that’s the thing you have to understand. So the BOJ, knows that. But then comes, then, in the Mrs. Takaichi, she, you know, that’s, to what extent she’s worried about FX movement? Actually, models. So, you know, that’s, the… whenever the exchange rate fluctuates, the first line of defense, in terms of jurisdiction, is Ministry of Finance, rather than a BOJ. You know, the BOJ is just an agent. In terms of foreign exchange intervention. So the MOF has to, you know, decide, when and to what extent the magnitude and the size of the intervention. So, so in that sense, you know, that’s the… here, I think the government and the BOJ Corporation matter a lot.
MOF controls the exchange rate decisions 00:18:19.770
So, suppose, you know, that Mrs. Takaichi, you know, thinks that way, then, you know, the BOJ may feel relieved from, you know, worrying about FX movements too much, okay? Okay, but second part is that the, the clearly, you know, even the, the, the influence, from the exchange rate to the inflation rate is, not that big. I mean, that the pass-through from the exchange rate to the inflation rate, is limited. Still, you know, the BOJ has to worry about the eventual, sort of, the elevated inflation rate, okay? So, is that temporary or not? Is a very difficult question to ask. So, the same as the food price increase. So, they may be temporary, but they may elevate inflation expectations in the medium to long-term inflation expectations. Then the, the, the central banks, you know, should act, on that information, that, the, the worry. So, still, I think, you know, that the, the BOJ, may move, act. On the, the exchange rate. But that depends on the, first and foremost, on the government, and, the BOG relationship.
A path to a stronger yen… 00:22:58.400
The Supply side… we do need to have… to strengthen the, the supply side of the Japanese economy. So, if that happens, then I think the Japanese yen would appreciate rather than depreciate. You know, that if the Japanese government put more, money, I mean, engage in the fiscal stimulus, then, you know, the FX movement must… the EM must, appreciate. So, if that’s the case, you know, that’s the… again, that’s the BOJ and the government cooperation, matters and, works, for better. Because, you know, that’s… now the BOJ doesn’t have to worry about the FX movement.
Learn from past mistakes 00:25:50.340
So that’s the, the sanae nomics, must, move on, and improve on the abronomics. But I think that the, the learning from past mistakes, is, the key, aspect. First of all, I think that’s the, Although, you know, we don’t have a kind of fear of differentiation right now, we cannot be so sure about the, sort of future prospect. So, in that sense, we’re going to have to manage the macroeconomic situation more carefully. So, having learning… learning from the past mistakes. So we don’t need… we don’t want to have kind of, another consumption tax hikes, you know, the premature tax hikes, and also premature rate hikes.
Updating Abe? 00:26:35.970
So that’s the underlying theme, okay? So that’s what… that’s where the Sanaenomics must keep Abenomics, the better part of the Abenomics, right, okay? But I think after that, the Japan faces a lot of challenges, like the depopulation.
Shrinking population and fewer Nobel Prizes… 00:26:53.870 And, you know, shrinking, population, and, also, dwindling, the, the spending on, the research and development. basic scientific research. The, this year, we, had, two nobel laureates, okay? Japan is the, the fifth, the biggest winners of, Nobel Royalties. But they are in the 70s, so that’s the, that means that, you know, that, we are now seeing the sort of the twilight of the, glorious days of Japanese scientific achievement.
Tax revenues are high driven by inflation! 00:28:07.130
So that’s where Sanaenomics comes in. So that, of course, we should be worried about the fiscal sustainability, but thanks to information that we actually have a kind of fiscal space that we can spend a little bit more, okay? But we’re going to have to. Inflation makes fiscal space, because inflation generates tax revenues, first of all. So, actually, the amount of the tax revenues is record high. Which means, actually, we are collecting more money and more than necessary money from people. So, that’s one of the reasons why people are dissatisfied with the current situation. They are not…only dissatisfied with the higher inflation rate, but also with higher tax, tax, taxes they have to pay. So, and, you know, again, that, government debt-to-GDP ratio, is… has been declining. economic situation. Yeah, so, so, so in that sense, we, the, the dynamics, must use, the, the fiscal space to, work on any problem the Japanese economy faces.
Outlook is less than solid 00:30:29.980
But, many economists, business economists, are predicting that the, the, the third quarter of this year, from July to September. The GDP growth figure must… may be negative.So, you know, as the inflation, is, 2.9, but, you know, as the GDP growth rate is, turning to negative. And last, the job market data is not that reassuring. We see some increase in the unemployment rate. And so, the… to be honest, I think that it’s not quite clear the Japanese economy in a good, footing. Yeah, so if that’s the case…
BOJ different from the Fed- PM due to meet Ueda 00:31:20.430 Now, it’s not like the Fed, because the BOJ doesn’t have a dual mandate. Still, it’s not… I think the BOJ needs a very strong reason to raise interest, faced with the sort of negative sort of economic data in the real, I think that Mr. Prime Minister is going to meet, the governor with, soon, because that’s more likely now a kind of a ritual. So, whenever, you know, the new prime minister got elected, he or she, you know, to meet…the governor of the BOJ. So it’s a kind of regular, thing. Okay. So… during that conversation, I think that the meeting… I think that the governor will, has to explain the logic behind the BOJ’s, the monetary policy. Right now, you know, I’m not that convinced about the BOJ’s logic, because, you know, BOJ wants to raise the underlying inflation rate.And they, admit that the underlying inflation rate is not yet reached at 2%, okay? On the other hand, you know, they are, you know, claiming that the current monetary policy is accommodative enough, so that we can achieve the 2% down the road.
WAKATABE Masazumi
Research Interests
History of Economic Thought, Central Banking in Theory and in Practice
Academic Degrees
MA in Economics, University of Toronto, 1994
Short Bio
My research interests are historical relationship between economic crises and economics and central banking in theory and in practice. Visiting fellows at Cambridge University, George Mason University, and Columbia University. Vice President of the History of Economics Society (2016 to 2017), Deputy Governor of the Bank of Japan (March 2018 to March 2023). Books include The Showa Depression (2004: Nikkei Prize for Excellent Book in Economics), Economic Crises and policy Responses (2009: Ishibashi Tanzan Prize), and Japan’s Great Stagnation and Abenomics (2015).
BOJ governor started winding down is a on the Faculty aculty of at Waseda University who served as Deputy Governor of the Bank of Japan from March 2018 to March 2023
Masazumi Wakatabe served as Deputy Governor of Bank of Japan during the years
BOJ
