What the New BOJ Governor Could Mean for the Yen

On Tuesday, February 14th, the government of Japan announced that it would nominate Kazuo Ueda to replace Haruhiko Kuroda as the head of the Bank of Japan (BOJ). Kuroda's term was set to end on April 8. Ueda’s nomination was disclosed in a document submitted to parliament, where the ruling coalition holds a majority. Following his nomination, the yen strengthened by 0.2% against the dollar (USD/JPY) and pushed higher against the euro (EUR/JPY). The nomination is expected to be approved by both chambers of parliament after a hearing, where Ueda will be questioned about his views on monetary policy. The hearing is anticipated to start on February 24, according to Japanese press. 

Along with nominating the new governor, the document also proposed nominees for the two deputy governor posts. Incumbent deputy governors Masayoshi Amamiya and Masazumi Wakatabe will see their terms end on March 20, slated to be replaced by former Financial Services Chief Ryozo Himino and long-term BOJ executive Shinishi Uchida. (Source:CNBC)

Who is the New BOJ Governor?

Kazuo Ueda is an experienced economic expert, earning a PhD in economics from the Massachusetts Institute of Technology (MIT). Currently, he holds various roles such as professor, dean of the business department at Kyoritsu Women's University in Tokyo, and chief councillor of the the BOJ's think tank, the Institute for Monetary and Economic Studies. With such credentials, his nomination shouldn’t beseen as a surprise. But despite that, he wasn't even speculated to be a candidate until his name was leaked last Friday, February 10th. And his appointment is seen as a surprise by analysts despite him being a BOJ's policy board member between 1998 and 2005. Perhaps the reason he wasn’t even considered as a dark-horse candidate, is that he has had an academic career since his BOJ policy board member role and remains an "unknown quantity" as far as economists and analysts are concerned.

The news an economist and former policy board member would succeed Kuroda was met with hawkish expectations initially as it signalled a change away from the ultralow interest rates and extreme quantitative easing that has characterised Kuroda's tenure at the BOJ. The yen strengthened, and there was short selling in the bond markets and pressure on stocks. The initial thought was that Ueda would finally move Japan towards raising rates since inflation continues to accelerate.

What Could it Mean for Markets

After the initial surprise, markets got a chance to scrutinise the heir apparent to Kuroda and started dialling back those bets that there would be a substantial shift in BOJ policy. After his nomination was leaked to the press last Friday, Ueda declined to discuss the job. When explicitly asked about monetary policy, he said that he thought the current policy was appropriate and that easing must continue in the current state. However, he did mention that the BOJ needed to have an exit strategy from the ultralow policy and review its stimulus program.

Speculation about how hawkish or dovish he could be might have to wait until his comments before parliament. Some believe he will keep easing, while others think he will start the process of raising rates. The government, on the other hand, appears to have chosen him for different reasons. He is first and foremost an academic, and the Chief Cabinet Secretary explained that the choice had to do with cooperating with the leaders of other central banks and communicating effectively with the market. In the context of hawkishess or dovishness, it should be noted that other central banks are in the process of hiking rates.

Next Steps

Although both chambers of Japan's parliament have to approve Ueda's nomination to the top job at the BOJ, Prime Minister Fumio Kishida's coalition holds a solid majority in both houses, making the appointment effectively a done deal. 

In any case, the leadership transition at the BOJ in the coming months could be the end of the experiment to try to shock the public out of a deflationary mindset. The new nomination could be the first step towards getting Japanese monetary policy to align with other major central banks raising rates. Yield curve control is expected to be unwound, potentially as soon as the second half of this year.

Conclusion

The surprise pick of Kazuo Ueda as the next BOJ governor makes the process of navigating expected changes in the bank's monetary policy in the future. There are no strong convictions in the market at the moment since Ueda's stance on policy remains largely unknown, except from him saying that the current policy is appropriate for the moment, and an exit strategy must be devised. Thus, Ueda’s nomination’s effects are yet to be seen.