[Post Guroda]② The Dove Faction Rises Again, Uneasy 'Yen'

Yen Exchange Rate Expected to Rise to 134 Yen Range
Stock Market Rebounds... Positive for Exports and Growth Stocks
Bond Market Weakness Continues, Gradual Stabilization Expected

Amamiya Masayoshi, Deputy Governor of the Bank of Japan

[Asia Economy Reporter Lee Ji-eun] Financial markets are shaking following reports that Masayoshi Amamiya, the current Deputy Governor of the Bank of Japan (BOJ), has been nominated as the next BOJ Governor. Since overseas speculative forces have been betting on a shift toward tightening in Japan's monetary policy, if a dovish candidate takes the governor position, significant changes are expected in the stock and foreign exchange markets.

According to the Nihon Keizai Shimbun on the 6th, the Japanese government is said to have offered the governor position to Deputy Governor Amamiya. The government is finalizing appointments for the governor and deputy governor and plans to present the final personnel proposal to the House of Representatives and House of Councillors' committee boards on the 10th.

◆Market Expectations for Tightening Dashed... Yen Value Predicted to Fall to the 134 Yen Range

Pedestrians are passing in front of an electronic billboard in downtown Tokyo displaying the exchange rate fluctuations between the Japanese yen and the US dollar. [Image source=Yonhap News]

Experts predict that if Deputy Governor Amamiya becomes the next governor, the yen's value will decline. Amamiya is classified as more dovish compared to other candidates, which is expected to dampen investors' hopes for a shift toward tightening monetary policy and encourage yen selling.

In fact, following the news of his nomination, the yen, which had been on an upward trend this year, began to weaken again. On the 6th, in the Tokyo foreign exchange market, the dollar-yen exchange rate surged to 132.90 during the session, marking the highest level since the 12th of last month. It is the first time in three weeks that the yen has broken through the 132 yen level. On the 7th, the dollar-yen rate remained in the 132 yen range.

Shinsuke Kajita, Chief Strategist at Resona Holdings, a Japanese commercial bank, said, "(If Amamiya's nomination is confirmed) the dollar-yen exchange rate could soar to 134.77, setting a yearly high," adding, "While it cannot be completely ruled out that he might change policy in other ways, a rapid shift in monetary policy is unlikely in the near term."

John Bromhead, an investment strategist at the Bank of New Zealand, said, "Since Amamiya supports Governor Kuroda, if the (Nihon Keizai) report is true, the dollar-yen exchange rate will decline," and added, "If he clearly denies the report, the exchange rate could quickly fall below 130 yen again."

◆Stock Market Expected to Rebound... Export Stocks Favored, Financial Stocks Unfavorable

On the other hand, the stock market is expected to rebound. Since dovish Deputy Governor Amamiya is anticipated to pursue a more accommodative monetary policy than other candidates, this is seen as positive for the overall stock market. As the yen is expected to weaken, individual stocks will see mixed outcomes. Export and growth stocks are expected to rise, while financial stocks are likely to underperform. In the case of financial stocks, if Amamiya abandons the Yield Curve Control (YCC) policy, which involves unlimited government bond purchases to maintain long-term interest rates at a certain level, the growth of the financial industry as a whole could slow down.

Shoki Omori, Senior Strategist at Mizuho Securities Tokyo, explained, "If Amamiya becomes governor, speculative sentiment toward risky assets will strengthen early in his term until clear monetary policy announcements are made." Shoji Harakawa, Chief Strategist at Tokai Tokyo Research Institute, also interpreted, "The yen is unlikely to rise significantly, but yen weakness could have a positive impact on the stock market."

Whether the negative interest rate policy will be discontinued is also expected to be a major factor influencing the stock market. On the 16th of last month, the Nissei Basic Research Institute forecasted in a report on stock price outlook following interest rate hikes that "if the Bank of Japan allows the benchmark interest rate to rise to 1.0%, the Nikkei Average (Nikkei 225 index) will fall below the 24,000 yen level."

As of the 7th, the Nikkei 225 index closed at 27,685.47, down 0.03% from the previous trading day.

◆Bond Market Initially Weak... Expected to Gradually Stabilize

Bank of Japan

The bond market is expected to be weak initially but gradually regain stability. After the nomination report of Deputy Governor Amamiya on the 6th, the 10-year government bond yield approached the BOJ's long-term interest rate fluctuation allowance limit of 0.5%. Bloomberg reported that investors interpreted this personnel move as a signal that there would be no major changes in BOJ's monetary policy, leading to reluctance in bond investments.

However, since investors who had already bet on tightening sold off large amounts of government bonds after the BOJ partially revised its monetary policy in December, the possibility of a stronger sell-off due to the new appointment is considered low. The strong selling pressure that began after December is gradually easing.

Bloomberg noted that Deputy Governor Amamiya is classified by investors as having the most similar stance to Governor Kuroda, and as investors lower their expectations for BOJ policy changes, the yen's value is falling while the stock market is benefiting, shaping the market trend.