‘Dark Horse’ Kazuo Ueda is turning expectations of the next Bank of Japan governor on its head

Prime Minister Fumio Kishida should select a continuity candidate as the next Bank of Japan governor from a conventional shortlist, while Haruhiko Kuroda prepares to step down after a decade at the helm of the central bank.

Instead, the Japanese leader sent shockwaves through global markets on Friday after reports reported that he broke with tradition and singled out an outsider in Japanese politics and the political establishment: economist Kazuo Ueda.

If the state legislature approves Ueda’s appointment as expected, it would be the first time in post-war Japan that an academic has been appointed central bank governor, a role that has historically alternated between BoJ and Treasury officials.

Ueda is no stranger to the central bank: He was a board member from 1998 to 2005 and helped launch Forward Guidance when it adopted its zero interest rate policy in the late 1990s. But the respected monetary policy expert, who has warned against prematurely ending Japan’s ultra-loose stance, faces the daunting task of steering Asia’s most advanced economy towards normalizing interest rates.

Following reports of Ueda’s selection, the yen briefly appreciated 1 percent against the dollar, while the 10-year Japanese government bond yield hit 0.5 percent – the upper limit of the BoJ’s trading range.

The selection process was closely monitored, according to people close to the government. Only a small circle of Kishida’s closest associates knew of the final decision, which some believe was made last month.

“There was a gag order on the BoJ governor issue and no one could talk about it,” said an MP from the ruling Liberal Democratic Party (LDP).

A previous report suggested that the government had approached Masayoshi Amamiya, the BoJ’s deputy governor, who was believed to be the front-runner for the post. But one of Kishida’s advisors had warned against taking the nomination as a done deal. “There’s still a possibility of a Dark Horse candidate,” he said.

Analysts said the top-secret process underscores the prime minister’s determination to elect a governor who would be able to go beyond politics to address the controversial turning point away from a decade of ultra-loose politics.

Kishida’s government has faced intense pressure from the LDP faction, previously led by the late former Prime Minister Shinzo Abe, to nominate a candidate who would not deviate from the “Abenomics” program that underpinned the BoJ’s ultra-loose monetary policy.

“Mr. Kishida had doubts that the election of the BoJ chief was influenced by the LDP’s internal political deliberations, so he chose an economist instead of Mr. Amamiya, who would likely have inherited Mr. Kuroda’s policies,” said Takao Toshikawa, editor-in-chief of the political newsletter Insideline.

According to people familiar with the discussions, Kishida is also expected to appoint Ryozo Himino, the former commissioner of the Financial Services Agency, and Shinichi Uchida, a BoJ executive who has played a central role in shaping Japan’s monetary policy, as deputy governors .

Uchida, 60, is considered a star within the BoJ and a future gubernatorial candidate with ties to the global banking community. People close to the central bank said Ueda, 71, is likely to rely heavily on Uchida to shape monetary policy.

Masatoshi Kikuchi, chief equity strategist at Mizuho Securities, said that Ueda, a professor emeritus at the University of Tokyo with a PhD in economics from MIT, does not belong to the reflationist school that advocates massive monetary expansion.

“He is a very balanced person politically. The end of quantitative and qualitative easing policies will be sooner than if Amamiya were elected,” Kikuchi added.

Following reports of his selection on Friday, Ueda told reporters that he believes the BoJ’s current monetary policy is appropriate.

“For now, I think it is necessary to continue the easing measures,” he said. “I’ve been an academic for a long time, so I like to make various decisions logically and explain them clearly.”

Ueda declined a request from the Financial Times for further comment.

But other analysts questioned whether Ueda’s selection was a sign of a divisive headhunting process that found few candidates willing to take the job.

Two people with direct knowledge of the discussions said Amamiya himself recommended Ueda after rejecting Kishida’s offer and said the BoJ, like the US Federal Reserve and European Central Bank, should consider academics for the governorship a “global standard” and not just changes between government officials.

Amamiya also argued that as the architect of the BoJ’s monetary policy, he was unable to scrutinize it fairly. Amamiya declined to comment.

In addition to Hiroshi Nakaso, another former BoJ deputy governor, Kishida also considered Shigeaki Okamoto, a former Treasury Department bureaucrat and vice chair of Japan Tobacco, but both privately expressed strong reluctance, according to people familiar with the discussions.

“Turning to an academic who has been active on monetary policy but hasn’t worked at the BoJ for nearly two decades reinforces the impression that Ueda was a backup plan,” said Tobias Harris, deputy director of think tank German Marshall Fund.

“I think politically it’s less a decision of strength than looking for someone who avoids in one way or another arousing strong feelings in the relevant veto players in the process,” he added.

After Kuroda steps down as governor in April, many economists believe Ueda will gradually move towards tightening monetary policy — a process that includes lifting commitments to keep 10-year government bond yields at historically low levels and raising interest rates , resulting in remaining negative at minus 0.1 percent.

“Japan is no longer in a state of deflation, so unprecedented measures such as negative interest rates and yield curve control should be abandoned under the new governor,” said Eiji Maeda, former BoJ deputy governor and now president of think tank Chiba Bank Research Institute.

However, most analysts assume that the new governor will stick to the zero interest rate policy for the foreseeable future.

The BoJ is under strong market pressure to end its aggressive monetary easing as Japan’s core inflation rate – which excludes volatile food prices – rose to a 41-year high of 4 percent.

However, the central bank has argued that price hikes have not resulted in sustained increases in wages and that loose monetary policy is still needed to support the economy amid risks of a slowdown outside Japan.

In an interview with the Nikkei in July, Ueda warned the BoJ against tightening monetary policy prematurely. However, he added that the central bank will need to review its “unprecedented” easing framework going forward: “The BoJ needs to prepare an exit strategy.”

https://www.ft.com/content/f2131796-f441-47e0-b1d0-c52d60064090 ‘Dark Horse’ Kazuo Ueda is turning expectations of the next Bank of Japan governor on its head

Adam Bradshaw

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