February 15, 2018 / 9:19 AM / 10 days ago

Choice of deputies may complicate Kuroda's job at the BOJ helm

TOKYO (Reuters) - Bank of Japan Governor Haruhiko Kuroda may be about to get a rare second term, but investors should not bank on it being as stable as his first five years in office.

Some of the most likely candidates to be his deputy governors could disagree with Kuroda on the speed of unwinding monetary easing and how much the economy should rely on fiscal spending, sources familiar with the matter say.

The government is expected to submit to parliament its nominees for the BOJ governor and deputy governors on Friday, sources with direct knowledge of the matter told Reuters.

Any signs of rift between Kuroda and his deputies could complicate the BOJ’s efforts to convince markets that it can engineer a slow but steady exit from a crisis-mode stimulus that has lasted for a decade.

“For the governor, the deputy governors are the go-to people for guidance on what policies work best for the economy,” said one of the sources. “The role they play will be crucial, not least because monetary policy has become so complex.”

A source told Reuters that Prime Minister Shinzo Abe would nominate Kuroda for another five-year term when the current one ends in April, a sign that ultra-loose monetary policy will remain in place.

The yen has gained more than 6 percent against the dollar so far this year, partly on speculation the BOJ may follow in the footsteps of other central banks in dialing back stimulus, to the dismay of policymakers worried about the damage a strong yen could have on Japan’s export-reliant economy.

Media reports that Kuroda will be reappointed did little to reverse the yen’s ascent, as investors perceived him as less willing to ramp up stimulus than other candidates.

POTENTIAL FOR RIFT

Some media reports say one of the deputies will be filled by BOJ Executive Director Masayoshi Amamiya, who has worked closely with Kuroda as a career central banker and unlikely to rock the boat.

The potential for rift rests with the other deputy post - usually filled by an academic or an outside expert on monetary policy - judging from the names of candidates floated in Japanese media, including former Abe aide Etsuro Honda, the sources say.

Honda told Reuters last November the BOJ needs to take “stronger policy steps” to achieve its inflation target, such as bigger fiscal spending backed by BOJ bank-rolling of government debt.

The idea, dubbed “helicopter money,” runs counter to the mainstream approach among BOJ bureaucrats, who prefer to dial back - not ramp up - an already massive stimulus program.

It also contradicts the view of Kuroda, who has embraced radical monetary steps but consistently called on the government to put Japan’s fiscal house in order.

FILE PHOTO: Takatoshi Ito, a private-sector member of the Council on Economic and Fiscal Policy (CEFP), speaks during an interview in Tokyo, Japan February 5, 2007. REUTERS/Yuriko Nakao/File Photo

Another possible candidate is an academic, Masazumi Wakatabe, who wants to accelerate the BOJ’s purchase of assets. That would require reversing a decision made in 2016 to abandon a target for asset-buying.

Kuroda may find a closer ally in Columbia University professor Takatoshi Ito, also a candidate who is known for having cultivated close ties with the governor when the two worked together at Japan’s finance ministry.

Ito had said maintaining current policy will suffice, echoing Kuroda’s views. But his calls for fiscal austerity makes him a less favorable choice for Abe, who prioritizes spending over fiscal reform, the sources say.

“The post will probably go to an advocate of Abe’s reflationary policies,” one of the sources said. “Some of the candidates have radical views on what more can be done.”

Bank of Japan (BOJ) Governor Haruhiko Kuroda attends a lower house budget committee session at the parliament in Tokyo, Japan, February 13, 2018. REUTERS/Toru Hanai

COMMUNICATION CHALLENGE

BOJ deputies rarely deviate from the views of their boss, as they are tasked to assist the governor in policy-making.

The current trio is no exception. Since joining the BOJ in 2013, the incumbent deputies - career central banker Hiroshi Nakaso and former academic Kikuo Iwata - have voted with Kuroda and mostly echoed the governor’s views on monetary policy.

Sharing a mandate to pull the economy out of deflation, the three deployed a huge asset-buying program in 2013 that failed to fire up inflation to their 2 percent target.

The task has become more complicated for the new leadership.

Years of heavy money printing have pushed rates near zero, hurting financial institutions by narrowing their margins.

With other central banks heading for the door, delaying an exit from monetary stimulus could leave the BOJ with a dearth of policy options to fight another recession.

The key task of the new BOJ leadership would be to telegraph its plan to unwind the bank’s radical stimulus, without spooking markets, analysts say.

That is no easy task, even for a team of like-minded policymakers. The delicate communication could crumble even by subtle hint of disagreement, making Abe’s pick of deputy governors more important than investors think, the sources say.

“Five years ago, Kuroda just needed to do something bold to spur growth. The next five years will be about how to unwind the stimulus and normalize policy,” said Koichi Haji, chief economist at NLI Research Institute.

“Communication would be extremely challenging. It might be hard for Kuroda to pull it off without deputies who can serve as restrained, good spokespeople of his policies.”

Additional reporting by Tetsushi Kajimoto, Yoshifumi Takemoto, Sumio Ito and Takaya Yamaguchi; Editing by Bill Tarrant

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