Japanese Prime Minister Fumio Kishida’s surprise pick for central bank governor, Kazuo Ueda, starts a series of hearings Friday as lawmakers consider his nomination amid strong market expectations of policy change to come.
(Bloomberg) — Japanese Prime Minister Fumio Kishida’s surprise pick for central bank governor, Kazuo Ueda, starts a series of hearings Friday as lawmakers consider his nomination amid strong market expectations of policy change to come.
Investors, economists and politicians are eager to know more about the current stance of the 71-year-old academic and former Bank of Japan board member, given the continued speculative strain on the BOJ’s stimulus framework, a distorted bond market and inflation soaring at 4%.
After the news broke that Ueda had been tapped for the position, he told reporters that the central bank needed to continue with stimulus for now and characterized current policy as appropriate.
Still, some 70% of polled economists see the central bank making a step toward normalizing policy by July.
Given the majorities Kishida’s ruling coalition has in parliament, Ueda is almost certain to win approval to start on April 9 after Friday’s session and an upper house hearing on Monday.
Urgency
Market players want to know how quickly Ueda would instigate change at the central bank. When Haruhiko Kuroda took the helm a decade ago he made it very clear big change was coming and showed that it could take place quickly.
Ueda’s background as an economist and his previous actions on the policy board suggest he prefers to reach conclusions after looking closely at data. That points to change down the line, not immediately.
Bond Bears, Yen Bulls Await Ueda Hearing With Anticipation
Yield Curve Control
From Treasuries and currencies to gold, global markets were impacted by the BOJ’s decision to effectively double the cap it keeps on 10-year government bond yields in December.
Some economists argue the central bank should widen the movement band again to 0.75% or even 1% either side of zero to relieve pressure that saw the BOJ fork out 23.7 trillion yen ($176 billion) in January alone to keep bond yields in line.
Ueda said in a local media report last year that tweaks to the BOJ’s control of bonds simply attracted speculation, a view that suggests he wouldn’t favor another widening of the band. He used similar logic to argue against reducing the maturity of the government debt yield it targets.
The professor’s stance against tweaks has triggered chatter in markets that if he deems change to YCC necessary, he will choose his moment to abandon it rather than salvage it.
Negative Rates
Ueda voted against raising interest rates in 2000 when he was on the BOJ board, citing the need to look at more data. The hike was widely criticized as premature after the fact. That has given some economists the view he would be reluctant to raise the short-term interest rate if there are any doubts over the decision.
Weak Yen
He’s indicated a weak yen is positive for the economy in past remarks. Should he touch on the currency, a stepping back from that view could fuel support for the idea that the stimulus tap can’t be left fully open.
Bond Market
Even after December’s tweak, the yield curve remains distorted and liquidity issues continue in the bond market. Ueda would be expected to say the economy and prices come before any side effects affecting the bond market, but comments to the contrary would be one of the biggest drivers of policy adjustment speculation.
Review
Board member Naoki Tamura reiterated his view Wednesday that a policy review will eventually be needed to assess the pros and cons of the BOJ’s stimulus program. Pulling the review card is a classic BOJ play to signal the need for change.
The central bank has used this strategy without too many market ructions in the past, despite keeping investors waiting for the results for months. But the intensity of speculation is on another level now. Calling a review risks triggering waves of bets against the central bank and ripples in markets globally.
Credibility
Ueda is characterized by economists and his former secretary at the BOJ as a good communicator. But he hasn’t spent the last 10 years staring down markets and trying to convince investors that one of the most ambitious experiments in monetary policy ever makes sense.
Any stumbles will generate concerns over his ability to run a steady ship. Sticking too closely to the lines of Kuroda may raise questions over whether he is speaking with his own voice. Signaling looming change risks sparking market bets and questions over whether he is evaluating all the evidence as an economist.
Inflation
The BOJ still sees inflation cooling below 2% in the upcoming fiscal year and in the following 12 months. The consensus among economists is also that price growth will slow partly as a result of government subsidies. Any variance on this view will set market tongues wagging.
Wages
The need for stronger wage growth to support stable inflation has taken on mantra-like status in the BOJ canon supporting continued stimulus. Ueda’s comments on whether he needs to see signs of a higher pay trend or data showing one will shape investors’ views on how much scope he has to adjust policy early.
–With assistance from Cormac Mullen.
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