Kazuo Ueda: Central bank finances and monetary policy conduct

Speech by Mr Kazuo Ueda, Governor of the Bank of Japan, at the 2023 Autumn Annual Meeting of the Japan Society of Monetary Economics, Fukuoka, 30 September 2023. 

The views expressed in this speech are those of the speaker and not the view of the BIS.

Introduction

It is my pleasure to have this opportunity to speak at the Japan Society of Monetary Economics.

Today I will speak on the theme of "Central Bank Finances and Monetary Policy Conduct." This issue has been gaining heightened interest, with foreign central banks entering the exit phase. On the other hand, in Japan, sustainable and stable achievement of the price stability target of 2 percent has not yet come in sight, and there is still a distance to go before reaching the "exit." Given the current distance, however, I believe now is the right time to discuss this topic from an objective perspective. At the Japan Society of Monetary Economics held 20 years ago, I gave a speech on "The Role of Capital for Central Banks." My speech today is a sequel to that one, but the fundamentals are essentially unchanged. Nevertheless, taking into account the developments in monetary policy at home and abroad during the subsequent two decades, I would like to provide somewhat of a review, reflecting upon this important topic once again.

At the time of my previous speech, the Bank of Japan had already implemented its quantitative easing policy and had started purchasing new financial assets, such as asset-backed securities. Moreover, amid the global disinflationary trend, other central banks were beginning to consider unconventional monetary policy measures. Under these circumstances, interest in central banks' financial risks grew.

In the last 20 years, with the disinflationary trend continuing, major central banks conducted monetary easing by cutting policy interest rates as well as implementing unconventional monetary policy measures such as large-scale asset purchases in response to shocks such as the Global Financial Crisis (GFC) and the COVID-19 pandemic. Since 2021, however, inflationary pressures have been rising worldwide due to the resumption of economic activities after the pandemic and the global surge in commodity prices. Against this backdrop, foreign central banks have been tightening monetary policy by raising policy interest rates rapidly and substantially and by reducing their asset holdings. Over the 20 years, there have been significant changes in the situation surrounding monetary policy and central bank finances. During this time, there have been many discussions on central bank finances and monetary policy conduct.