Central-bank surprises in Japan are as rare as double-decker buses that arrive on time in my strike-plagued homeland, Britain. But both apparently come along in twos.
Japanese Prime Minister Fumio Kishida is set on Tuesday to play a wildcard with his pick of the economist Kazuo Ueda to head the Bank of Japan, according to the Nikkei business daily, which gets leaks on this sort of thing. It's a selection that breaks with precedent in turning to academia for the top central-bank post for the world's third-largest economy.
Although Ueda has moderated workshops and conferences that were hosted by the BOJ, and was a BOJ policy-board member from 1998 to 2005, he is an outsider. He has a doctorate in economics from the Massachusetts Institute of Technology, and is a former dean of economics at the University of Tokyo. He is currently a professor at the Kyoritsu Women's University and is chief councilor of the Institute for Monetary and Economic Studies, the BOJ's think tank.
Word of Ueda's likely selection made the yen suddenly stronger, heading from ¥131.61 to the U.S. dollar to ¥129.80, while the 10-year Japanese government bond hit the upper limit of its trading band. But traders have now digested the shock, and the yen has weakened again to ¥132.70 to the greenback now.
The frontrunner had been BOJ Deputy Governor Masayoshi Amamiya, a career central banker known as "Mr. BOJ," with his predecessor Hiroshi Nakaso widely viewed as the only other alternative.
In fact, traders say they were blindsided by Ueda's selection, joking they have had to read up on "Who-eda," and judge his view by his past publications and speeches. The yen reaction stems mainly from word that Amamiya will not be taking the post, having apparently turned it down.
In December, the BOJ made its first recent surprise when it tweaked the acceptable band it will allow for the trading of the 10-year Japanese government bond's yield. As I said at the time, the content of the surprise wasn't earthshattering, but traders were excited that the BOJ might be shifting away from its super easy monetary policy. I think the move simply bought them more time to leave rates low, for longer.
The Japanese parliament must approve Kishida's choice. But since Kishida's party, the Liberal Democratic Party, controls both houses of the Diet, that's virtually a given. It would mark the first time in post-war Japan that the central bank chief has not come from the ranks of BOJ officials or from the Japanese finance ministry.
Current Governor Haruhiko Kuroda will step down on April 8 after a decade in charge. He assumed the post as reformist prime minister Shinzo Abe, so sadly assassinated last July, took charge, and was a key Abe ally in ensuring that the three arrows of "Abenomics" were at least fired, if not hit home.
The political discourse around the appointment suggests that Kishida is keen to select someone who is "above" politics. Abe's legacy has raised questions surrounding the tight ties between the LDP and the Unification Church or "Moonies," the main motivation cited by his killer.
Abe's faction remains powerful within the LDP. Its leaders had been pushing for a "continuity candidate" who would ensure that the tenets of Abenomics are sustained. Kishida has increased the wiggle room necessary to divert from that path.
Ueda is a surprise selection, but the 71-year-old is unlikely to be a radical. He in 2000 voted against the BOJ abandoning its zero-interest-rate policy, and says now after being identified as Kuroda's likely successor that he believes the BOJ's current policies are correct.
"For now, I think it is necessary to continue easing measures," he told reporters. "I have been an academic for a long time, so I want to make various decisions logically, and explain in a clear manner." He said monetary easing "must continue." The Nikkei says his selection likely only came with a reassurance he would not push the BOJ to a "hasty exit."
Nor is Ueda apparently the first choice. Amamiya was reportedly offered the post but declined, recommending Ueda instead. Amamiya believes he is too tied to the current BOJ policy that he has helped shape to review it fairly, and feels Japan should be considering academics for the top central bank post instead of shuffling through a roster of government officials. It's a path both the United States and Eurozone have previously followed.
Kishida also considered Nakaso as well as former finance-ministry official Shigeaki Okamoto, but both privately expressed misgivings about taking the job. If he is a backup choice, Ueda as an academic without political ties is also less likely to raise the hackles of any of the LDP factions that could veto an appointment.
In the long run, Ueda is more likely to shift the BOJ away from its reliance on super easy monetary policy than current BOJ insiders. He may gradually shift toward a tighter policy, with the BOJ currently maintaining short-term interest rates that are in negative territory at -0.1%. He told the Nikkei in July that "there is a need for the BOJ to prepare an exit strategy."
Kishida is also reportedly set to name former Financial Services Agency chief Ryozo Himino and BOJ official Shinichi Uchida as deputy governors of the BOJ. Uchida, who at 60 would be more than a decade younger than his new boss, is a rising star within the BOJ ranks who may use that post as a stepping stone on the route to becoming governor himself.
The central Bank of Japan was a pioneer in shifting to negative interest rates, virtually unheard of when it made that change in 2016. But the move became commonplace in response to the ravages of pandemic-induced economic shutdowns.
The BOJ has been attempting to ensure that an inflation rate of 2% sets in, for good, in Japan. It is currently getting its wish, with the latest inflation reading at a 41-year-high of 4.0% for December. As commodity and food prices ease, inflation should fall. The full-year price increase may come in at 1.9%, according to FocusEconomics forecasts, with inflation at 1.1% in 2024. We should on Tuesday get readings for Japanese GDP for both Q4 and full-year 2022.
Kuroda, the current BOJ leader, has noted that Japanese wages have not yet started to increase in a sustained manner. So much of the inflation reading is temporary, in a nation that imports all its oil. That has discouraged him from making any significant change to his policies before he leaves his post
