Japan’s next central bank chief may rue promotion
HONG KONG, Feb 13 (Reuters Breakingviews) - Haruhiko Kuroda, who is due to depart the Bank of Japan (8301.T) in April after a decade in charge, will leave a host of problems for his successor to solve. The first priority is to adjust the complex system designed to keep interest rates at or below zero, which is wobbling as inflation rises. Yet the economy looks fragile, Japan Inc is reluctant to invest and geopolitical risk abounds. It might be the hardest job in central banking.
Rumours have been swirling about who might take it. On Friday, the Nikkei reported that Prime Minister Fumio Kishida’s government had approached Deputy Governor Masayoshi Amamiya to succeed Kuroda, but Amamiya declined. Now Kazuo Ueda, a former BOJ board member, will be nominated, Reuters reported on Friday citing three government sources.
Whoever gets the job will step immediately into a briskly crackling bond market fire. As global inflation rose in reaction to American stimulus and then war in Ukraine in 2021, Japanese food and energy prices spiked. Central bankers usually deprecate such volatile factors when setting interest rates, but the “core-core” index that excludes both food and energy is heating up too, rising at an annual rate of 3% in December, a level not seen since 1991.
Yet domestic interest rates have stayed put. As higher U.S. rates widened the gap between U.S. and Japanese government bond yields, the yen weakened 25% between March and October to touch 152 per dollar, another level not seen since the 1990s, prompting the BOJ to intervene in currency markets. At the same time, bond traders began attacking Kuroda’s yield curve control policy, which caps key sovereign rates near zero. After they repeatedly pushed yields on 10-year government bonds over the top of the 0.25% trading band, Kuroda ceded ground in December, raising the top limit to 0.5%. The market promptly began testing that too, but Kuroda has declined to compromise further.
The cost of defence is rising. The BOJ planned to hike its monthly target for the purchase of Japanese government bonds to 9 trillion yen ($68 billion). In fact, it has spent an average of 1.3 trillion yen per trading day since the band widened: nearly 50 trillion yen in total, per Refinitiv data, and still counting. The central bank already owns over half of Japan’s sovereign bonds and is sure to suffer large losses when their prices fall, which they eventually must.
The situation is unsustainable, so the new governor will have to find a compromise that placates an impatient market without derailing efforts to spark a rebound from a 0.8% annualised contraction in GDP during the third quarter of 2022. That would be a trick Kuroda himself failed pull off. International comparisons do not bode well. The Reserve Bank of Australia’s exit from its YCC regime in 2021, for example, was so clumsy it seriously damaged its credibility.
This calculus is complicated by another thorny problem on the incoming governor’s to-do list: corporate stinginess. To justify any normalisation of interest rates, local economists want to see signs that incomes are outgrowing prices in a sustainable manner. Unfortunately, most Japanese bosses are notoriously resistant to granting salary hikes. That means the BOJ must carefully interpret the tea leaves from upcoming annual wage negotiations in April, and decide whether they support normalisation, or not. A misread in either direction could be catastrophic, setting off either a recession or an inflationary spiral.
The central bank chief must also work to put the country’s vast stack of inert money back to work. Decades of economic anemia have inculcated a reflexive national reluctance to invest, and recent geopolitical tension has done little to change that. Non-financial corporations’ cash and deposits reached a record $1.9 trillion at the end of September according to Ministry of Finance data; liquid assets including cash, securities and receivables stood at nearly $4 trillion, equivalent to roughly three quarters of annual output.
The new governor will have to encourage the consolidation of the country’s inefficient regional banks and support the digitisation of a financial system enamored with paper money, fax machines and floppy disks. In capital markets, Kuroda’s successor will have to revive bond market liquidity and dampen foreign exchange volatility, refurbishing the yen’s reputation as a reliable reserve currency.
Finally, there is the political challenge. Kuroda effectively put the central bank at the service of former Prime Minister Shinzo Abe’s “Abenomics” stimulus programme. That successfully defeated deflation but damaged the BOJ’s reputation for independence. Abenomics also pushed government debt to over 200% of GDP. Abe, Japan’s longest serving prime minister, left office in September 2020 and was assassinated in July. Fumio Kishida, the current leader, is having popularity problems and will want the central bank to support his aggressive agenda, which includes hiking defence spending, promoting innovative startups and redistributing wealth. An academic like Ueda, who lacks strong factional support at the BOJ or the MoF, could start off in a dangerously weak position.
Investors should allow for pleasant surprises, however. If wage negotiations beat expectations, demand recovers and tourism surges, monetary policy can move away from its ultra-loose stance without a market meltdown. Analysts at UBS expect GDP to have returned to growth in the last three months of last year, rising at an annual rate of 1.1%. If these trends continue in 2023, Japan Inc might start repatriating funds stashed abroad, supporting domestic markets (albeit perhaps at overseas markets’ expense). In which case, being governor of the BOJ might turn out to be a decent job after all.
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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Updates to add chart.)
CONTEXT NEWS
The yen jumped more than 1% and hit 129.8 per dollar on Feb. 10 after reports from Nikkei, Reuters and others that the government will nominate Kazuo Ueda, a former member of the central bank's policy board, as the next governor of the Bank of Japan.
Japan's government will formally present its nominees for the next BOJ governor and two deputy governors to parliament on Feb. 14, said Tsuyoshi Takagi, the ruling Liberal Democratic Party's parliament affairs chief for the lower house, on Feb. 10.
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