The nomination of Bank of Japan Governor and Deputy Governors

What happened?

Various media reported that Japan’s Prime Minister Kishida intends to nominate Dr. Kazuo Ueda (71) as new Governor of the BOJ, Mr. Shinichi Uchida and Mr. Ryozo Himino as Deputy Governors of the BOJ. Nikkei newspaper reported this Monday that the government approached the current Deputy Governor Amamiya for the BOJ Governorship post but Nikkei reported on Friday that the government now intends to nominate Dr. Ueda since Mr. Amamiya refused to take the post. The nomination of Dr. Ueda would be a surprise for the market as the name of Dr. Ueda has not been floating at all as the candidates for BOJ Governorship.    

Dr. Ueda is currently a professor at Kyoritsu Women’s University after he retired from University of Tokyo as an economics professor. He served as a board member of BOJ during 1998-2005, when the BOJ initiated zero interest rate policy and quantitative monetary easing. He also served several governmental posts. Information on Dr. Ueda’s views on monetary policy is limited but he is known as a person who voted against abolishing zero-interest rate policy in 2000 when he served a BOJ board member. He also provided an article to Nikkei newspaper in July 2022, where he discussed the importance of avoiding rough-and-ready policy decision to raise policy rates. Dr. Ueda commented today to reporters that the current BOJ policy was appropriate and we needed to maintain the current monetary easing.    

Mr. Uchida currently serves the BOJ as Executive Director. Mr. Uchida is an BOJ insider and considered to be one of the architects of BOJ’s current policy framework. He was the Director-General of BOJ’s Monetary Affairs Department when Mr. Kuroda initiated large-scale accommodative policy in 2012. Mr. Himino was the former Commissioner of Financial Supervisory Agency. Mr. Himino has an extensive experience in international and bank regulation arena as he was the first Japanese secretary-general of the Basel Committee on Banking Supervision. So if these nominations materialize, Dr. Ueda, the first person from academia to become the BOJ Governor, will be supported by two deputies who have extensive  policy expertise.    

How have markets reacted?

After the news of nomination broke out, Japanese yen appreciated by 1.4% against the US dollar¹, since the nominee was not Mr. Amamiya who was considered to be most dovish among various candidates. But after Dr. Ueda’s rather dovish view started to be recognized by the market, yen depreciated back by about 0.8% to 130.97yen per US dollar. Nikkei 225 futures also went down initially but recovered some ground later, which led to a 0.5% decline compared with the Friday’s closing price. 

What is our outlook on the situation?

If Dr. Ueda, Mr. Uchida and Mr. Himino are nominated officially on February 14, they are likely to attend Diet’s committee scheduled on February 24 to receive questions from Diet committee members, which will be the opportunity for the market to understand Dr. Ueda’s views on monetary policy. After both Upper House and Lower House consent these nominations, Mr. Uchida and Mr. Himino become Deputy Governors in late March while Dr. Ueda starts his carrier as new Governor in early April.        

Given Dr. Ueda’s previous comments on monetary policy, substantial changes to the current monetary policy are not very likely to be implemented in the near term, although he may communicate with the market more clearly on new BOJ strategies for abolishing the current Yield Curve Control (YCC) policy. Looking from an economic fundamentals perspective, there is a risk that a worsening external environment stagnates domestic economic activity. In order for Japan to achieve a stable 2% inflation rate in the medium term, Japan needs to see relatively significant wage increases over the next two years.  In this regard, the BOJ is likely to continue its accommodative policy to support wage hikes, although some modification needs to be implemented if the market distortion as a result of YCC policy worsens. 

What are the risks to our view?

One risk is that domestic demand exceeds expectations and there is an earlier-than-expected achievement of the BOJ’s 2% inflation target, prompting BOJ to shift toward tightening earlier than expected. Another risk is the worsening market distortions, in which case the BOJ may have to quickly implement de facto tightening measures through changes and revisions to the YCC framework.