The potential for a surprise choice to be the next Bank of Japan governor will send the yen climbing, Japanese stocks falling and investors scurrying to find out all they can about economist Kazuo Ueda.
(Bloomberg) — The potential for a surprise choice to be the next Bank of Japan governor will send the yen climbing, Japanese stocks falling and investors scurrying to find out all they can about economist Kazuo Ueda.
The Nikkei reported that the economist and a former member of the BOJ policy board was to be nominated to replace Haruhiko Kuroda. The favorite for the role, Masayoshi Amamiya, had turned down the position, it said.
The initial market reaction to the news suggested traders saw Ueda as having a hawkish bent but many strategists cautioned that such a view may be premature. Some expect a degree of continuity of policy and pointed to the importance of economic data in interpreting whether there will be any change.
They also proposed that the potential nominee for a deputy governor role, Shinichi Uchida, would play an important role in any future policy decision.
Here’s a selection of comments from market participants:
Positive for Yen
“I’m purely speculating but the fact that Amamiya didn’t take the job means there’s a clear tension between what Kishida wants to do and what Amamiya (dove/YCC advocate) wants to do,” said Viraj Patel, strategist at Vanda Research in London. “Bottom line is the markets have to price in greater odds of a new BoJ regime – and a break away from Kurodanomics/Abenomics. And that is ultimately positive for the yen.”
Stocks to Fall
“The market was completely taken by surprise.” said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities. “Markets have assumed that Amamiya will become the next governor. The stock market will open lower next Monday. Putting aside what kind of policy Ueda will take, the way the government has handled this seems a bit clumsy, having raised expectations that Amamiya will succeed.”
Watch Wage Talks
“The market appears to be relieved that its is not Amamiya – who is associated with dovish policies. However, very little is know about Ueda,” said Jane Foley, a strategist at Rabobank in London. “Given his former presence on the BoJ Board, there is still a strong chance that he may not be too different in his view to Kuroda and that policy change will still depend on the spring wage talks, and will be slow.”
Outlook Unclear
The market is expecting a tweak of BOJ policy under Ueda, “at least compared to path expected under Amamiya,” said Jan von Gerich, chief strategist at Nordea Markets in Helsinki. “But let’s see. The outlook is far from being as clear compared to the shift that was expected some months ago and when the BoJ widened the corridor for the 10-year yield.”
Normalization Probability
“As an academic who was a BoJ board member between 1998 and 2005 he comes with a degree of apparent policy credibility despite not being on the perceived short list of candidates to replace Kuroda,” said Jeremy Stretch, head of Group-of-10 currency strategy at Canadian Imperial Bank of Commerce in London. “It has long been assumed that Amamiya was set to step up and he was considered a continuity candidate and was deemed set to extend Abenomics. Consequently, anyone other than Amamiya is considered to have a higher probability of promoting policy normalization, encouraging compression in UST-JGB spreads and tolerating a stronger JPY.”
Near-Term Volatility
“He comes with a strong pedigree,” said Ilya Spivak, head of global macro at tastylive. “He has been on the BOJ board before before, and his academic background is at MIT, where his advisor was Stan Fischer. There are a lot of big central bankers that came up under Fischer.”
“The initial implications for stocks seem negative in the sense that if the markets read this as hawkish, higher yields may spook equities. However, it’s not exactly black and white. Working down the distortions that YCC has created is not a bad thing ultimately for the resilience of Japanese financial markets. There will be some near term volatility as markets listen to what he has in mind and price that in, but it may end up that stocks like what they hear eventually.”
Good Choice
“Markets will probably want to depict him as a hawk or a dove but in my opinion, he is neither of them. He is someone who looks at the reality and seeks the best policy decision,” said Nobuyasu Atago, chief economist at Ichiyoshi Securities. “Back when he was a policy board member, there was call for quantitative easing but then later you had debate about its side-effects. And I suspect he was making his decisions with his sense of balance.”
“I think Ueda is a good choice.”
Kuroda Opposite
“I am not sure how much I can trust this report, but since Ueda was not on the list at all, the yen is appreciating, and stock price is likely to fall given the impression of potential tightening,” said Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank Ltd. “However, we don’t know the sources of the news, and we don’t want to follow the news too closely.”
“I don’t think that most people thought of him as a candidate. He comes from an academic background and is seen as an orthodox economist, so in a sense the opposite of Governor Kuroda. He follows principles and economic theory, and I have the impression that he will manage policy according to the such data. I honestly feel that it would be very strange to suddenly start a very different monetary policy from here.”
Hawkish Tilt
“Ueda was at the BOJ around 1998-2005, and people are looking at headlines from when he was there. Some of the headlines certainly have a hawkish tilt to them,” said Derek Halpenny, head of European global markets research at MUFG in London. “It’s important to emphasise context in terms of what was happening at that particular time. But the distance he has from the current policy framework has created some uncertainty about what his interpretations would be, so markets are unclear what this means.”
“If the conclusions are that Ueda is more hawkish, the more likely it would be that we would see a move back into the 120s in dollar/yen relatively quickly. We’ve been down to 128, 129 so that’s certainly feasible.”
Interesting Deputy
“The much talked about Amimiya’s resistance to taking the job was fairly overlooked I think because it was widely reported that he didn’t want it and Nakaso bailed out early by taking another job,” said Amir Anvarzadeh, a Japan equity strategist at Asymmetric Advisors in Singapore. “We all knew picking Yamaguchi would be unlikely as Kishida wouldn’t want a potential JGB crisis, so someone else was bound to be in contention.”
“Ueda-san doesn’t sound too dovish by some past work it seems,” he said. “The appointment of Shinichi Uchida to deputy governor is also interesting as he is a technician overseeing Kuroda’s QE and could be very useful to have around if there is need for its unwinding.”
Well Balanced
“It’s a very well-balanced selection” of BOJ governor and deputy governor nominees, says Shinsuke Kajita, chief strategist at Resona Holdings in Tokyo. “There are no particular hawkish or dovish tints, and they are likely to take the right policy at the right time.”
“The inclusion of Uchida will ensure stability and continuity of policy.”
“Markets have been expecting Amamiya so the yen is reacting by strengthening, but I think the move will eventually subside.”
One Term
“My first take is that the BoJ and Government is already looking at the following Governor which is likely going to be Shinichi Uchida, ace proper BoJ banker,” said Shoki Omori, chief Japan desk strategist at Mizuho Securities in Tokyo. “Looks like Professor Ueda was chosen as temporary Governor (one term) that can clean up the tangled wire of policies that the BoJ is currently playing with.”
“He’s a cautious person so I’d say he won’t take away NIRP/YCC at once. Dropping YCC will be likely his first mission with balancing the tightening effect in real economy by Mr. Uchida as well as financial conditions by Mr. Himino.”
“I see bear steepening in the short-to long-term, bear-flattening in the long-end in JPY rates, Futures selling off, and USDJPY lower in the near term.”
–With assistance from Ishika Mookerjee, Winnie Hsu, Naomi Tajitsu, Daisuke Sakai and Masaki Kondo.
(Updates with additional comments)
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