By Takaya Yamaguchi and Kentaro Sugiyama
Tokyo (Reuters) – Japan’s government is likely to appoint academic Kazuo Ueda as the Bank of Japan’s next governor, two government officials told Reuters, a surprise choice that could see the country finally aligning with other major economies in raising interest rates.
Ueda, a former member of the BOJ’s policy board and an academic at Kyoritsu Women’s University, is considered an expert on monetary policy and played a key role in battling the initial phase of Japan’s deflation with the introduction of huge amounts of asset purchases and forward guidance for financial markets.
The yen and bond yields initially rose on the news, which came as a complete surprise and fuelled bets the 71-year-old could end super-low interest rates sooner than if top contender and dovish BOJ Deputy Governor Masayoshi Amamiya had got the job.
The Japanese currency trimmed gains after Ueda, in comments streamed online by Nippon TV, said it was appropriate for the BOJ to maintain its current ultra-easy policy. He said nothing had been decided about his nomination.
Investors have repeatedly tried to push up Japanese government bond yields in recent months on expectations the BOJ will start to gradually phase out its massive stimulus programme when a new governor takes over after Haruhiko Kuroda’s second term ends in April.
Years of heavy bond buying have increasingly distorted the country’s bond markets and many market watchers had thought further tweaks in policy were inevitable.
GRAPHIC: The BOJ’s YCC faces a reckoning (https://www.reuters.com/graphics/JAPAN-ECONOMY/BOJ/zjvqjwdaqpx/chart.jpg)
“Kuroda’s policies will be modified and monetary policy will head toward normalisation. But any step will be taken cautiously to avoid any adverse effect on markets and financial institutions,” said former BOJ board member Takahide Kiuchi.
BOJ watchers and people who worked with Ueda describe him as a well-balanced pragmatist who is neither an explicit hawk nor a dove, and well respected within the central bank.
“Ueda won’t make any abrupt, hasty moves toward policy normalisation. But he won’t leave the side-effects of the BOJ’s policy, such as dysfunctions seen in the bond market, unattended,” said Nobuyasu Atago, a former BOJ official who has experience working with Ueda.
“I expect the BOJ to gradually phase out YCC this year,” he said, referring to the bank’s bond yield control policy.
While central banks around the world have been scrambling to cool stubbornly high inflation with rate hikes, the BOJ has been in no rush to change its super-loose policy stance on the view that wage hikes must accompany recent cost-push inflation.
Even as Japanese inflation hit 4% in December, double the BOJ’s 2% target, Kuroda has argued it is too early to tell if price rises will be sustainable.
The government will also nominate Ryozo Himino, former head of Japan’s banking watchdog, and BOJ executive Shinichi Uchida as deputy governors, the two officials with knowledge of the matter said, speaking on condition of anonymity as they were not authorised to speak publicly.
The Nikkei reported earlier that Ueda, Himino and Uchida will make up the new BOJ leadership if confirmed by parliament.
Many central bank watchers had seen Amamiya as the strongest candidate to take the helm given his deep experience in monetary policy, but the Nikkei reported that he had declined.
The yen strengthened after the Nikkei reported the appointments, before trimming some of its gains. The dollar briefly fell 1.2% to 129.8 yen. It was last down 0.5% to 130.90 yen.
Japan’s 10-year government bond yield hit 0.50%, the top end of the BOJ’s policy band.[JP/]
Prime Minister Fumio Kishida said on Friday the government is expected to present the nominees to parliament on Feb. 14.
“Being a theorist and practitioner at the same time would make (Ueda) well positioned going forward as the BOJ enters a difficult period of (policy) normalization,” said Shotaro Kugo, an economist at Daiwa Institute of Research.
“None of the three governor/deputy governors appear to have the (dovish) reflationist idea. I can see the government’s intention to renew the monetary policy direction from the previous one.”
In an opinion piece that ran on the Nikkei in July last year, Ueda said warned the BOJ against prematurely raising interest rates just because inflation briefly exceeded 2%.
But he also said the BOJ must consider an exit strategy from ultra-loose monetary policy, and review its extraordinary stimulus programme at some point, according to the piece.
Ueda served on the BOJ’s board from 1998 to 2005. He voted against raising interest rates to 0.25% from zero in August 2000, arguing that the bank could wait a while longer given limited inflation. The BOJ later reversed its decision and cut rates again.
(Reporting by Tokyo newsroom, Akriti Sharma in Bengaluru; Writing by Leika Kihara; Editing by Jacqueline Wong, Sam Holmes and Kim Coghill)