UPDATE 7-Japan seen nominating "deflation basher" as BOJ head-sources

Mon Feb 25, 2013 7:01am EST

* Govt to nominate reflationary academic as deputy BOJ head
    * Central banker to fill other deputy BOJ head post
    * Govt to submit nominees this week to parliament
    * Kuroda at helm raises risk of BOJ easing April 4-sources
    * Yen hits 33-month low, 5-year govt bond yield at record
low


    By Leika Kihara and Yuko Yoshikawa
    TOKYO, Feb 25 (Reuters) - Japan's prime minister is likely
to nominate an advocate of aggressive monetary easing - Asian
Development Bank President Haruhiko Kuroda - as the next central
bank governor to step up his fight to finally rid the country of
deflation.
    Shinzo Abe won a big election victory in December promising
to revive the fortunes of an economy stuck in the doldrums for
most of the past two decades. He has repeatedly called for a
more aggressive central bank willing to take radical steps.
    The yen fell on the nomination news to a 33-month low
and the yield on five-year government bonds hit a record low as
markets moved to factor in bolder monetary policy.
    "Kuroda is a fan of a weaker yen and of deflation bashing,"
said Kit Juckes, a strategist at Societe Generale in London.
    Sources said the government is likely to nominate Kuroda and
two deputies this week for parliamentary approval.
    It is also lining up Kikuo Iwata, an academic who advocates
unorthodox monetary easing steps, and BOJ Executive Director
Hiroshi Nakaso, who now oversees the central bank's
international operations, as deputy governors, a source familiar
with the process said. Iwata told reporters he had been offered
the job and he would accept it.
    Like the U.S. Federal Reserve, the Bank of Japan has cut
interest rates close to zero. Since then it has adopted
unorthodox measures to inject cash into the economy, currently
in its fourth recession since 2000, to try to stimulate growth.
    But Kuroda has long criticised the BOJ as too slow to expand
stimulus, and is expected to push for more radical efforts to
achieve a 2 percent inflation target set in January.
    "Kuroda's nomination won't change the course that has been
dictated by Abe in recent months - that is aggressive monetary
policy, but perhaps thanks to the inclusion of Iwata the market
will expect more eye-catching bold easing measures," said
Masamichi Adachi, senior economist at JPMorgan Securities in
Tokyo.
    The nominations must be approved by both houses of
parliament, which means Abe will need opposition support because
his ruling-bloc lacks a majority in the upper house. The
incumbents leave March 19.
    Officials in the Democratic Party of Japan (DPJ) - whose
votes could be enough to confirm nominees - have said the DPJ
was likely to support Kuroda, although some members may oppose
Iwata on grounds that his reflationary views are too extreme.
    Iwata has argued the BOJ is mostly to blame for prolonging
deflation by not being aggressive enough in easing policy.
    In the absence of DPJ support, the smaller Your Party will
be key for the government securing approval for its nominees.
However, party head Yoshimi Watanabe - an advocate of unorthodox
easing steps - criticised the overall line-up as an
ill-considered attempt at "balanced personnel".
    "Prime Minister Abe's administration took power promising
'regime change' (at the BOJ) but I don't think this will lead to
regime change," Watanabe told reporters.
 
 
    
    If approved, the nominations increase the chances that the
BOJ will ease monetary policy on April 3-4, the first rate
review under the new leadership, say officials with knowledge of
the central bank's thinking.
    "Monetary easing is pretty much a given. The question is
what specifically the BOJ will do," said one official, who spoke
on condition of anonymity due to the sensitivity of the matter.
    The BOJ has already pledged to pump 101 trillion yen ($1
trillion) into the economy by the end of this year by buying
assets and through a lending programme and to shift to
open-ended purchases from next year.
    To underline a more aggressive policy in April, the most
likely options include starting the open-ended buying sooner
than planned and increasing the amount of monthly asset
purchases, the officials said.
    Extending government bond purchases to maturities beyond the
current three-years or buying more risky assets, such as
exchange traded funds, are also options.
    A drastic overhaul in the way the BOJ buys assets could take
some time to materialise, while foreign bond purchases are also
unlikely as Kuroda has ruled it out as an option, they say.
    
    YEN SLIDE
    Kuroda, 68, has been considered a strong candidate to
replace current BOJ Governor Masaaki Shirakawa because of his
extensive experience in international policy and his calls for
more aggressive monetary easing that matched the views of Abe.
    As Japan's top financial diplomat from 1999 to 2003, he
aggressively intervened in the exchange-rate market to weaken
the yen to support the country's export-reliant economy.
    This time, Kuroda - a fluent English speaker with a masters
degree from Oxford - may have to mobilise his international
contacts to fend off criticism that Japan's monetary policy is
aimed at weakening the yen to help exporters.
    Kuroda has called for the BOJ to achieve its 2 percent
inflation target in two years by pumping money into the economy
through unorthodox steps, such as expanding government bond
purchases and buying shares. Inflation in Japan has rarely
reached 2 percent since the early 1990s.
    There are several hundred trillion yen worth of domestic
financial assets that the BOJ could buy to expand its
quantitative easing, he said on February 11. 
    The yen has weakened nearly 20 percent against the dollar
since November, when Abe began calling for bolder monetary
easing.
    The cheaper yen has helped improve profits at Japanese
exporters, notably carmakers like Mazda Motor Corp,
which raised its operating profit outlook for the year ending in
March by 80 percent.
    Shirakawa's last rate review will be on March 6-7. The BOJ
meets twice in April, once on April 3-4 and then on April 26.
    Abe has stressed the need for the new governor to have
international contacts, suggesting he prefers someone with
experience in financial diplomacy, like Kuroda who, as president
of the 67-member ADB rubs shoulders with policymakers around the
world.
    In nominating a BOJ governor, the premier usually respects
the views of the finance minister and the ministry's bureaucrats
because they work closely with the central bank on economic
policy.
    The finance ministry lobbied for former financial bureaucrat
Toshiro Muto, but was likely turned down by Abe and his aides
who saw him as lacking international contacts and less willing
to experiment with untried monetary easing steps.
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