[Post Kuroda] ① Abenomics: A Safe Farewell or a Forced Goodbye... Japan's Choice

[Global Focus]
Japanese Government Finalizing Nominee List
Kishida Prefers Wage Increases Over Sudden Monetary Easing Changes to Tackle Soaring Inflation
Dovish Amamiya Likely to Become Deputy Governor

[Asia Economy Reporter Lee Ji-eun] As the term of Haruhiko Kuroda, Governor of the Bank of Japan (BOJ) and a key figure behind 'Abenomics,' nears its end, Masayoshi Amamiya, the current BOJ Deputy Governor, has emerged as the leading candidate to succeed him.

Deputy Governor Amamiya is regarded as a representative dove, but he is expected to join the Kishida Fumio Cabinet's efforts to move away from Abenomics. However, a shift from the accommodative monetary policy that the market expects to tightening is likely to take time.

Among several candidates mentioned as Kuroda's successor, Amamiya is considered the frontrunner. According to the Nihon Keizai Shimbun, the Japanese government is reportedly finalizing personnel plans to appoint Amamiya as governor. The government plans to present the personnel proposals for the BOJ governor and two deputy governors to the House of Representatives and House of Councillors' committee boards on the 10th.

◆Cabinet Wants a Figure to Move Away from Abenomics... Concerned About Speed of Policy Shift

[Image source=Yonhap News]

If Deputy Governor Amamiya takes the governor position, it is expected that Japan's large-scale accommodative monetary policy, maintained for 10 years, will undergo changes. Once Governor Kuroda's term ends, the prevailing view is that the intensity of Japan's quantitative easing will be reduced compared to before. Japan's inflation has surged due to rising raw material prices caused by the Russia-Ukraine war and the sharp depreciation of the yen, leading to speculation that large-scale easing policies can no longer be sustained.

However, rather than a sudden shift in monetary policy direction, cooperation with the Kishida Cabinet and consequent changes are anticipated. The Kishida Cabinet aims to move away from Abenomics, which focused on aggressive quantitative easing, toward a Kishida-style 'income-led growth' policy emphasizing wage increases. Considering the possibility of deflation, they prefer to respond to soaring prices by raising wages rather than making abrupt changes to the quantitative easing stance.

Given this economic policy direction, the dominant expectation is that the Kishida Cabinet will appoint a figure capable of implementing a departure from Abenomics as the next governor. At the same time, considering the economic slowdown caused by COVID-19, it is believed that the next governor will be someone who can gradually transition monetary policy.

The Nihon Keizai Shimbun explained, "The Japanese government acknowledges the need to consider an exit from the monetary easing stance in the medium to long term," but "does not want radical policy changes."

◆Amamiya to Shift to Moderate Easing... Only Radical Policies to be Adjusted

Masayoshi Amamiya, Deputy Governor of the Bank of Japan

Deputy Governor Amamiya, named by the Nihon Keizai Shimbun as the leading candidate for the next governor, is seen as someone who will promote the transition of monetary policy according to the Kishida Cabinet's wishes but at a non-radical pace. Earlier, major foreign media also mentioned Amamiya as the most likely nominee.

Amamiya led the Yield Curve Control (YCC) policy introduced shortly after Governor Kuroda took office and is known within the BOJ as 'Mr. BOJ.' He is well-versed in overall financial policy and is regarded as capable of flexible responses.

Regarding monetary policy stance, many analyses suggest he is more dovish than Nakaso, the former BOJ deputy governor who was also a leading candidate. Other candidates previously mentioned include former BOJ Deputy Governors Nakaso and Yamaguchi Hirohide.

If appointed as the next governor, he is expected to maintain the easing policy stance but gradually lower the intensity of current monetary policy. In particular, the Nihon Keizai Shimbun analyzes that high-intensity financial easing measures such as the YCC policy, which involves unlimited purchases of government bonds to maintain long-term interest rates at a certain level, and the negative interest rate policy will be abolished immediately.

However, it is expected that he will respond cautiously to abolishing the so-called 'quantitative easing' policy itself, which changed the short-term interest rate control target from the unsecured call rate to the current account balances. Since 2008, the BOJ has targeted current account balances instead of the call rate, which applies to ultra-short-term funds traded between financial institutions. As the call rate fell to near zero, making it difficult to stimulate the economy further, the BOJ chose to supply liquidity by purchasing bonds held by banks.

The Nihon Keizai Shimbun explained that Amamiya "will focus on minimizing the side effects on the economy by returning the two-dimensional easing policy aimed at quantitative and qualitative easing to a normal level of easing," while "continuing the foundation of accommodative policy for economic growth, which generally aligns with the Kishida Cabinet's stance."

If Amamiya is appointed governor as this media outlet predicts, the key will be whether the deputy governor accepts the position. According to the Nihon Keizai Shimbun, Amamiya has reportedly declined the governor position.

The next governor will have the heavy responsibility of addressing economic side effects caused by the easing policy maintained for 10 years. The Japanese market is currently experiencing a distortion where yields on 8- and 9-year government bonds exceed the 10-year bond yield due to the policy of unlimited government bond purchases to maintain long-term interest rates at a certain level. Japanese media predict that if Prime Minister Kishida strongly pushes, Amamiya is likely to accept the governor position.

◆Market Expected Hawkish Candidate... Yen Declines as Tightening Expectations Fade

A Japanese citizen stands in front of a brokerage in Tokyo displaying the dollar-yen exchange rate. [Image source=Reuters Yonhap News]

The news of Deputy Governor Amamiya's nomination caused turmoil in the financial market. The yen, which had been declining this year, surged intraday to 132.48 yen, marking the highest level since the 12th of last month. The yen falling to the 132 yen level is the first time in three weeks.

Experts say that investors' expectations for a complete abandonment of Japan's accommodative monetary policy due to Amamiya's nomination have faded. Since last December, when the BOJ partially revised monetary policy by raising the allowable fluctuation range of long-term interest rates, market participants have been betting on the possibility of Japan shifting to tightening.

Dein Chekov, a strategist at Sweden's Nordea Bank, told Bloomberg, "Some investors hoped the Japanese government would appoint a more hawkish figure as governor. If the report is accurate and Amamiya accepts the government's offer, investors will have to revise their expectations that the BOJ will soon abandon ultra-loose monetary policy."

◆International Financial Experts and Monetary Policy Critics... Two Candidates Mentioned Together

Former Deputy Governor of the Bank of Japan Hiroshi Nakaso (left in photo), Former Deputy Governor of the Bank of Japan Hirohide Yamaguchi (right in photo) [Image source=Bank of Japan]

Deputy Governor Nakaso, who was considered a leading candidate, is rumored to have fallen out of the running after recently becoming chairman of the APEC (Asia-Pacific Economic Cooperation) Advisory Committee.

Nakaso played a key role as director of the Financial Markets Department during the 2008 global financial crisis, responding to the world economic crisis. The market expects that if Nakaso is appointed governor, he will focus on revising radical monetary policies that caused side effects in the market, such as negative interest rates. This analysis considers Nakaso's expertise in crisis management and financial systems and his previous concerns about Japan's aggressive quantitative easing policies.

Former Deputy Governor Yamaguchi Hirohide, who has recently emerged as a leading candidate, has been more critical of Japan's quantitative easing policy than Nakaso. Yamaguchi had been considered a less likely candidate compared to Amamiya and Nakaso, but predictions that the Kishida Cabinet might appoint Yamaguchi, who holds a negative stance on quantitative easing to move away from Abenomics, have brought him into the spotlight.

He served as BOJ deputy governor for five years until 2013 and has expressed critical views on the radical measures taken by Prime Minister Abe and the BOJ to escape deflation.

The market predicts that if Yamaguchi becomes the next governor, Japan will part ways with aggressive quantitative easing policies. In an interview with major foreign media last December, Yamaguchi emphasized, "If I can bear the risks, the BOJ should make its monetary policy framework more flexible and raise the long-term interest rate target next year."

However, major foreign media reported that both candidates declined the next governor position, similar to Deputy Governor Amamiya.

Meanwhile, Bloomberg reported on the 7th that Japanese government officials denied the reports of Amamiya's nomination as governor, calling them unfounded. Yoshihiko Isozaki, Japan's Chief Cabinet Secretary, also denied the Nihon Keizai Shimbun's report, stating that the government has not yet offered the governor position to Amamiya.