Investors said Bank of Japan Governor nominee Kazuo Ueda’s appearance in parliament was broadly as expected and contained little to change their convictions on the central bank’s path for policy.
(Bloomberg) — Investors said Bank of Japan Governor nominee Kazuo Ueda’s appearance in parliament was broadly as expected and contained little to change their convictions on the central bank’s path for policy.
Japan’s bond futures edged higher, the yen was little changed and bank shares slipped as Ueda spoke — the three assets most sensitive to the question of what will he do when he takes over from Haruhiko Kuroda in April. Some strategists said his comments to lawmakers leaned a touch dovish and may weigh on the yen, while others said his cautious stance would be a positive for stocks.
Ueda Backs BOJ Easing Now, Normalization If Price Goal Reached
Here’s some reaction from market participants:
Yen Pressure
“We expected Ueda to take it slow and he’s starting off echoing Kuroda’s views. He has been out of touch with BOJ policy making since 2005 and will take time even if he was to consider policy normalization at some stage,” said Charu Chanana, a senior markets strategist at Saxo Capital Markets. “His neutral comments, coming against market’s hawkish expectations and together with the rising global yields, suggest yen could embark on a weakening trend again once we are past this volatility.”
Positive for Stocks
“Ueda is taking taking a very cautious stance, which is very positive for the stock market,” said Ayako Sera, a market strategist at Sumitomo Mitsui Trust Bank Ltd. “The comments by Ueda came as no surprise. Since he did not say to change policy abruptly, the market is relieved.”
While it seems like Ueda is thinking slightly further ahead than Kuroda, as he mentioned an exit from monetary policy, he sounded more dovish than expected, Sera added. “The comment itself actually does not come as hawkish, since he is not saying to terminate monetary easing immediately but will make decisions based on the economic situation.”
No Surprises
“The first comments by Ueda were unlikely to bring any surprises given that he is not even in there yet,” said Amir Anvarzadeh, a strategist at Asymmetric Advisors in Singapore. “So no surprise that the tone remains dovish.”
“What is more interesting is the reaction from bank stocks which although down a touch and underperforming in a tech led rally, they are holding their own as is the yen,” he added.
Economics Lecture
“I feel that as foreign investors see the script they are going to be disappointed if they were expecting change in BOJ policy direction,” said Shoki Omori, chief Japan desk strategist at Mizuho Securities in Tokyo. “The latter part, during the Q&A with MPs sounded like an undergraduate economics class lecture.”
A surprise policy shift in March “is not my base case as it will put dirt on Governor Kuroda’s face,” he said. “Furthermore, April MPM monetary policy change is unlikely now.”
For the yen, “the ball is on the dollar side. US data and the Fed’s views are going to be important,” he added.
Sense of Relief
“Bonds are being somewhat bought on a sense of relief, but this is the kind of hearing that should not negate the current policy,” said Naomi Muguruma, chief fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities. “The purpose of the hearing is to ensure that the appointment process proceeds smoothly, so for now, the hearing will go off without a hitch.”
Policy Continuation
Ueda’s comments so far today sounds slightly more dovish than expected and they basically indicate the continuation of current BOJ policy, Hirofumi Kasai, senior strategist at Tokio Marine Asset Management said during a interview with Bloomberg TV. The chances that current Governor Kuroda does something at the March meeting are very small, given the next governor is now assigned, although that chance cannot be completely denied, he said.
A change may happen sometime in mid-summer — Ueda will closely watch the economy and prices to make decisions and that’s his very strong message at this point, Kasai added.
Slightly Dovish
Ueda’s comments today were slightly more dovish-than-expected only compared with what the markets have expected, but not compared with his basic stances that he has been suggesting, said Teppei Ino, head of global markets research at MUFG Bank Ltd. Today’s remarks were very well-balanced and reasonable to his overall view, and not something that would spur appreciation pressure on the yen.
Close attention should also be paid to Governor Kuroda’s last policy meeting in March and the market may remain quite nervous until then, although the chances of doing something are quite small, Ino added.
Job Interview
“Ueda is auditioning for a job, and it is probably not a good idea to sound like a maverick when one is doing so,” said Alvin Tan, head of Asia FX strategy at RBC in Singapore. “Nonetheless, BoJ as an institution is not going to be easy to shift in a radically new direction, and in any event it is unclear if Ueda wants to be a maverick.”
“Policy normalization is underway at the BoJ, but it will be a very gradual and cautious process, even with a new governor at the helm,” Tan added.
Watch Yen
Many in the market expected Ueda to dodge questions about specific measures, but to take an overall dovish stance, most likely slightly short or neutral on the yen, said Yuji Saito, senior advisor at Credit Agricole CIB’s global market division in Tokyo. In fact, Ueda’s remarks, while not changing the path of eventual normalization, gave the impression of taking his time and giving a model answer.
If the hearing for the deputy governor candidates in the afternoon is also within expectations, there is a possibility that position adjustment buying of the yen may occur before the weekend, so we need to be careful, Saito added.
–With assistance from Saburo Funabiki, David Ingles, Haslinda Amin and Hiroko Komiya.
(Updates with additional comments.)
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