Bank of Japan could see gradual shift in approach with new governor

(Alliance News) - Under new leadership, the Bank of Japan could shift away from its ultra-loose policy, as the country battles with its highest inflation rate in decades - though still low by international standards - and the recent nosedive of the yen against the dollar.

The Japanese government is planning to appoint Kazuo Ueda as the new governor of the Bank of Japan, according to local media reports on Friday.

According to the Nikkei newspaper, Ueda will take up the role when Haruhiko Kuroda's second term ends in April. Ueda is an economics professor, and former BoJ board member, serving from 1998 to 2005.

"The news surprised the market as he would bring a bit more of a hawkish tilt to monetary policy than the top contender, Masayoshi Amamiya. Local media also reported that Amamiya refused to take the post," said Min Joo Kang, ING's South Korea and Japan senior economist.

The yen gained some ground against the dollar temporarily, with the dollar quoted at USD130.97 earlier in Friday's session, down from JPY131.10 at the London equities close on Thursday.

"Unlike the US Federal Reserve, the European Central Bank and the Bank of England, the BoJ is yet to raise interest rates and it is yet to officially try to sterilise quantitative easing and launch quantitative tightening, whereby its balance sheet starts to shrink," explained AJ Bell investment director Russ Mould.

Its zero-interest-rate policy has been in place since 1999, Mould noted.

"After six years of [quantitative and qualitative easing], even Japan has begun to see the sort of inflation for which Japan has strived after decades of near-deflation in the wake of the debt-fuelled equity and property bubble that finally popped as the 1980s ended and the 1990s began," Mould continued.

The Bank of Japan has come under pressure to change its policy over the past year, which has since the yen plummet over 20% since the beginning of 2021.

The fight against deflation has had other negative consequences, with purchasing power falling among Japanese workers and consumers, AJ Bell's Mould noted.

Inflation in Japan currently stands at a 32-year high of 4.0%.

The central bank had shocked the market back in December, with an unexpected tweak in policy, widening the target range for 1-year government bonds.

"But that did not ease the pressure for long. Yes, the yen rallied, but the yield on the 10-year JGB flew out to 0.50% in the blink of an eye. Bond vigilantes continue to test the BoJ's commitment to defending that new line in the sand," Mould said.

ING's Kang mantains Ueda is "unlikely" to change the BoJ's ultra-loose stance on monetary policy straight away.

"[Ueda] has warned against raising rates too early but has also argued that an exit strategy from the current ultra-easing framework is needed at some point in the future," Kang explained.

Consequently, the economist expects markets to start paying attention to incoming economic data, such as wage growth and inflation.

The official announcement for the governor position, as well as the two deputy positions, will be on February 14. This will be followed by parliamentary hearings on February 24.

By Elizabeth Winter, Alliance News senior markets reporter

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