In the Birthplace of Bank of Japan Chief, Ueda’s Policy Puzzle is Uncovered

By Sakura Murakami

MAKINOHARA, Japan – Bank of Japan Governor Kazuo Ueda faces significant challenges in steering the world’s fourth-largest economy away from monetary stimulus, as highlighted by his birthplace, Makinohara.

This coastal town, which once prospered from a now-declining tea industry, illustrates the stark contrast between Japan’s struggling rural areas and its thriving mega-cities. Makinohara was recently featured in a widely publicized list of towns at risk of vanishing due to depopulation.

Shortly after Ueda’s appointment in April 2023, the 73-year-old spoke about the "very serious challenge" posed by rural areas to Japan’s economic recovery.

Since then, the Bank of Japan has begun to ease the massive stimulus that had supported the economy for decades, implementing its first interest rate hikes in 17 years, driven by rising wages and consumer demand. Further rate increases are anticipated by the end of the year.

However, in Makinohara, the complexities the Bank of Japan encounters in crafting policy for a divided economy are apparent, based on interviews with eight residents, including business owners and town officials.

Concerns have emerged regarding the speed of the Bank of Japan’s policy shift, particularly its impact on local companies struggling to raise wages or manage higher loan repayments. Residents shared a local economic situation that starkly contrasts the more optimistic national outlook presented by the central bank.

Mayor Kikuo Sugimoto stated that Makinohara is not keeping pace with the broader economic recovery in Japan. He noted, "While the BOJ believes rate increases are justified due to inflation and rising wages, we are not yet experiencing that in rural areas."

Yoshimaru Suzuki, who operates a 200-year-old soy sauce production company that diversified into wiring assembly for vehicles and ships, expressed apprehension, stating, "Rising rates will act as a brake." He mentioned difficulty in raising salaries beyond the minimum wage increase and worries that rate hikes and a stronger yen would negatively affect his export-dependent customers. "We can’t survive without increased domestic demand," he added, expressing concern over his ability to repay bank loans if rates continue to rise.

A Bank of Japan survey conducted in June revealed that business sentiment in the broader Tokai region—which includes Shizuoka Prefecture, home to Makinohara—lagged behind national averages by five points, making it one of the lowest among nine surveyed regions.

Amid these challenges, Japan’s new Prime Minister Shigeru Ishiba, whose ruling party is gearing up for a general election, emphasized the need to revitalize and support rural areas, stating that Japan was not prepared for another rate hike.

The Bank of Japan declined to comment on how its policy shift impacts rural economies like Makinohara.

RURAL CONNECTIONS

Both of Ueda’s parents hail from Makinohara, and he is celebrated as the town’s most noteworthy resident. After moving to Tokyo for his studies at a young age, his relatives recall his visits back to the town during school holidays.

During a visit to his family home, tucked away on a quiet street, the atmosphere was subdued, with few pedestrians around. Ueda’s uncle, Rokuro, reminisced about their childhood summers spent together, highlighting Ueda’s preference for listening to English lessons rather than playing outside.

Ueda later studied economics in the U.S., served on the Bank of Japan’s policy board from 1998 to 2005, and taught at various universities before assuming his current role.

In 2010, he returned to Makinohara to deliver a lecture on Japan’s economic challenges at the invitation of the then-mayor, who is also a distant relative. Though the lecture’s technical content might have eluded the local audience, it showcased that someone from Makinohara could wield significant national influence.

"Somewhere in Kazuo’s heart, there are roots that tie him here too," the former mayor said.

Many locals, including Ueda, have made the journey to Tokyo and seldom return. In the 1980s, Makinohara was a center for Japan’s flourishing tea industry, enabling its affluent farmers to indulge in leisure activities like golf. However, as that industry waned due to shifting consumer preferences, the town now relies on a few major employers, including car manufacturer Suzuki and automotive parts supplier Yazaki.

With a population decline exceeding 20% over the last two decades, Makinohara now has about 43,000 residents, the majority of whom are in their 70s. A recent study labeled it as facing the risk of disappearing, particularly as projections suggest that the number of women aged 20 to 39 could halve by 2050.

BUSINESS INNOVATION

Despite their modest contribution to overall GDP, rural areas like Makinohara host numerous small- and medium-sized enterprises, which make up over half of Japan’s economy and account for significant job creation.

When the Bank of Japan raised rates for a second time in July, Ueda acknowledged that some small businesses may struggle with rising wage demands. This is true for Akio Yamamoto, CEO of an agricultural business with deep historical roots that processes tea and sells fertilizers. He expressed a desire to raise employee wages but highlighted the limitations faced by small firms, leading him to reduce staff by not replacing retirees.

Alongside the shifts in monetary policy, new government strategies now increasingly allow unproductive businesses to fail. When discussing considerations for rural areas, Ueda underscored the importance of innovation and adaptation among businesses.

Some local businesses, like the agricultural startup M2 Labo, have embraced this mandate. Its president expressed enthusiasm for Ueda’s policy direction, believing that higher rates and a stronger yen could strengthen their international investments.

This spirit of innovation is also apparent in Makinohara, which boasts a craft brewery, a boutique coffee shop, and an artificial wave surf stadium. The town hosts a global business competition, and one of its past winners, a Ukrainian company specializing in biodegradable packaging, plans to set up a factory in the area.

Yamamoto is also looking towards growth, experimenting with banana cultivation in land that was once a tea field. "Isn’t it more interesting to create a new local specialty?" he mused, contemplating the future of his agricultural endeavors. "Maybe in 10 years, they’ll call me the founder of the famous Makinohara banana," he chuckled.