After the first interest rate hike, Kazuo Ueda has become the "most dovish leader" of the Bank of Japan?

The Zhitong Finance APP noted that in 2024, Ueda Kazuo led Japan's first interest rate hike in 17 years, marking a dramatic shift for the Bank of Japan, which was once dominated by advocates of ultra-loose monetary policy—now, this central bank governor has become one of the least hawkish members of the policy committee.

The 73-year-old governor will attend this week's Federal Reserve's annual Jackson Hole symposium. Federal Reserve Chairman Jerome Powell's assessment of the U.S. economy and hints about the timing of the next rate cut will be important reference points for the Bank of Japan's decision-making.

Analysts and insiders revealed that in recent months, Ueda has become one of the more cautious members of the Bank of Japan's nine-member policy committee. His concerns about the economic impact of U.S. tariffs may suppress the hawkish stance of colleagues calling for further rate hikes.

The analysis section of the Bank of Japan's recent outlook report corroborates this cautious attitude. The report points out that tariffs could have expected shocks on the Japanese economy, complicating the decision on the timing of the next rate hike. "The Japan-U.S. trade agreement has reduced tariff uncertainty, but has not eliminated it," said a source familiar with the central bank's thinking, with another source echoing the same sentiment, "It is too early for the Bank of Japan to be optimistic about the economic outlook."

There is a growing call within the policy committee for Ueda to pay more attention to inflationary pressures. In this economy, which was once deeply mired in deflation, price pressures are building. A rate cut by the Federal Reserve could push up the yen against the dollar, potentially alleviating inflation concerns brought about by a weak yen—but depending on the speed of appreciation, it could also harm exporters' profits.

The minutes from the July meeting indicated that stubborn food inflation led some committee members to warn of potential second-round price effects, which could serve as a basis for another rate hike. These hawkish signals sharply contrast with Ueda's statements at the post-meeting press conference, where he emphasized that potential inflation, centered on domestic demand and wages, remains below the central bank's target, proving that slowing the pace of rate hikes is reasonable.

"Governor Ueda seems particularly focused on the trends in the U.S. economy," said former Bank of Japan policy board member Nobuhiko Nakao, "If he becomes more confident that the U.S. economy will stabilize, the Bank of Japan may consider raising rates within the year."

Hawkish Circle

On the surface, hawks seem to be gaining the upper hand. Among the current members, Tamura Naoki, Takada Hajime, and Oda Junko are viewed by the market as hawks, partly because they have recently warned that rising food prices could lead to broader, sustained inflation. Vice President Ishi Mineyoshi has warned that "maintaining real negative interest rates for a long time is abnormal," making him one of the most hawkish members of the leadership.

In stark contrast, the influence and voice of the doves, who dominated the committee when Ueda's predecessor Kuroda Haruhiko launched a massive stimulus plan in 2013, have significantly weakened. Nakamura Toyoaki, who voted against the rate hike in January, retired in June, and his successor, Masui Kazuaki, is considered to hold a neutral stance. Noguchi Akira, who once advocated for massive money printing, has also shifted to a neutral position and voted in favor of the rate hike in January This shift in policy inclination has made Ueda and his deputy, Shinichi Uchida, who comes from the central bank system, appear more dovish. Their statements continue to focus on the downside risks facing Japan's fragile economy. Sources familiar with the central bank's thinking say this cautious attitude reflects the Bank of Japan's preference to wait for more data to assess whether the global economy, including Japan, can withstand the impact of U.S. tariffs.

This also reflects the persistent concerns within the Bank of Japan—just as the bank's economists have predicted, the damage to exports and capital expenditure may worsen in the coming months. In the July quarterly outlook report, the bank's economists warned that corporate profits could decline this year due to the impact of U.S. tariffs, which in turn could drag down capital expenditure.

These concerns are not unfounded. Although the U.S.-Japan trade agreement agrees to reduce tariffs on Japan's pillar industry, automobile exports, the U.S. side has yet to clarify the timeline for tax reductions. Many analysts expect that as the impact of U.S. tariffs deepens, the export momentum that boosted Japan's GDP in the second quarter will weaken later this year. Even hawkish committee members have warned that such risks may require caution regarding interest rate hikes.

"We need to carefully examine the negative impacts that U.S. tariffs may bring," committee member Akira Takeda stated in a speech on July 3. Although the committee presents a hawkish tilt, considering the influence of the governor on decision-making, Ueda's cautious stance may still prevail.

With the support of officials from core sectors, the governor will draft policy and interest rate proposals for the committee to vote on. Most proposals, including the end of a decade-long stimulus policy last year, have been passed unanimously or by a majority vote. Since the current committee framework was established in 1998, no governor's proposal has ever been rejected.

"There are no strong negotiators in the current committee who can initiate a rebellion. It is hard to imagine hawks proposing interest rate hikes against the governor's wishes," said Nobuyoshi Adachi, a former Bank of Japan official who served as a policy secretary to hawkish member Miyako Suda. "Governor Ueda's leadership within the committee seems quite solid."