The outlook for Japan’s monetary policy in 2023 now seems more cloudy than ever.
Following a recent move that caught pretty much everyone off guard, market participants are becoming more keenly focused on whether the Bank of Japan will introduce more surprises next year, the Japan Times wrote on Sunday.
And with BOJ Gov. Haruhiko Kuroda expected to be replaced in April, bringing an end to his decade-long tenure, the stage is set for plenty of speculation over the coming months, as the central bank’s policy stance will likely differ depending on who the successor is.
The government generally discloses its candidate recommendations in February, and the appointment will need to be approved by parliament. And the selection of the governor can be an indication of how the government intends to manage the overall economy.
Current Deputy Gov. Masayoshi Amamiya and former Deputy Gov. Hiroshi Nakaso are among the names that have been floated in the media as possible replacements.
Amamiya, who has spent his entire career at the BOJ since 1979, is one of the key officials in charge of shaping the current monetary policy under Kuroda. As such, market observers expect that if Amamiya becomes the new governor, he is likely to continue Kuroda’s policy approach and will be cautious when it comes to an exit strategy.
“Amamiya understands the framework of Kuroda’s monetary policy more than anybody else, so I think there will be less uncertainties,” said Daiju Aoki, chief Japan economist at UBS Sumi Trust Wealth Management.
Economists pointed out that considering the economic outlook, it’s unlikely that the BOJ will look to signal a normalization of policy — that is, a move away from actively seeking higher inflation and containing the rise of interest rates.
Overseas economies including the US and Europe are expected to slow down, posing a risk to the fragile Japanese economy, so “I don’t think the BOJ will introduce policies (including normalization) to allow long-term interest rates to rise,” said Saisuke Sakai, a senior economist at Mizuho Research and Technologies.
Err on the Side of Caution
“The BOJ doesn’t want to be responsible for causing an economic downturn, and the new governor wants to avoid such a failure, so it’s likely that they will take a more cautious stance.”
As rate hikes in the US will likely come to an end next year, the interest rate gap between the US and Japan will likely stop widening as well, with economists forecasting that the dollar will gradually depreciate, as opposed to the strong dollar trend seen in 2022.
“If the BOJ makes more tweaks, including to its yield curve control, the yen’s rate might rally to the ¥110 or ¥100 marks” — which would represent rapid swings — as the rate is estimated at around ¥125 in 2023, Aoki said.
“A rapid gain in the yen’s value negatively affects exporters. … I think the BOJ would want to avoid an excessive appreciation of the yen, so it would not change policy.”
After its policy meeting last week, the BOJ announced a modification to its so-called yield curve control, a policy of purchasing unlimited amounts of 10-year government bonds to keep JGB yields at around 0%.
The BOJ now allows long-term yields to fluctuate plus and minus 50 basis points, doubling from the previous 25-basis-point range, which is effectively seen as a rate hike. It maintained the short-term interest rate at minus 0.1%.
Kuroda explained that the tweak to the yield curve control policy was to improve market functions, thereby more smoothly spreading out the effect of monetary easing, and he denied that it was a step toward normalization.
Although he stressed that it was not a rate hike, his explanation contradicted his remark in September that a move to widen the bounds for 10-year bond yields would disturb the effectiveness of the monetary policy.
Kuroda reiterated last week that the BOJ’s goal of achieving stable and sustainable 2% inflation underpinned by wage hikes was unchanged, saying “it is still premature to talk specifics about (changes) to the framework of monetary policy and the exit strategy.”
Uncertain Motives
The BOJ’s true motive is uncertain, but some market observers speculate that the central bank wanted to lay the groundwork for its exit strategy in case such a shift becomes necessary sooner than expected — for instance sometime next year.
“My main scenario is that it won’t embark on an exit strategy (next year), but the BOJ may be thinking that the chances are not zero,” Sakai said, adding that now the bank has modified policy before Kuroda ends his term, the new governor will feel less pressure to make changes.
The possibility of tweaks will likely rise if Nakaso is appointed as the new governor, Sakai said.
The chairman of the Daiwa Institute of Research, a Tokyo-based think tank, worked as a BOJ official for about 40 years until he ended his term as a deputy governor in 2018.
As a BOJ official, Nakaso dealt with financial crises, including the fallout from the Lehman Brothers crash in 2008, and worked with Kuroda as a deputy governor between 2013 to 2018.
But Nakaso has pointed out that Abenomics — former PM Shinzo Abe’s economic agenda based on radical monetary easing, fiscal spending and growth strategies — has relied too much on monetary policy and proved that the inflation target cannot be achieved just through the efforts of the central bank. Economists predict that Nakaso might start making tweaks more quickly than Amamiya if he were to lead the central bank.
It is possible that the BOJ will examine and review the decadelong ultraeasy monetary policy under the new governor and take steps to change it in the second half of next year, Sakai added.
In any case, the biggest challenge for the new governor will be how to normalize policy, and the timing of a shift will likely change depending on who takes the helm and the economic circumstances.
Rolling back the policy will be a daunting task, as missteps could lead to a spike in long-term interest rates and cause market turmoil.
If someone other than Amamiya or Nakaso is chosen, “it would imply that the exit strategy might be carried out more speedily than the BOJ would normally allow,” said Shunsuke Kobayashi, chief economist at Mizuho Securities. In that case, there would be more uncertainties over the outlook of the BOJ’s monetary policy, he said.
Other names that have appeared in the media include Masatsugu Asakawa, a former senior finance ministry official who now heads the Asian Development Bank.
It has been reported that government officials are considering revising a policy accord with the BOJ that was crafted in 2013, which set a 2% inflation target with a dovish monetary policy.
Kishida and members of his faction within the ruling Liberal Democratic Party are close to the finance ministry and tend to prefer a strong yen, Kobayashi said.
Given how the yen’s value plummeted this year against the US dollar, pushing up import costs and damaging Kishida’s approval ratings in the process, “we can easily imagine that the prime minister’s office pressured the BOJ to break away from the monetary easing,” Kobayashi said of the BOJ’s move last week.
With the appointment of the new governor, Kishida might accelerate the departure from Abenomics in an effort to put his own stamp on economic policy.
“The BOJ will still be in charge of the actual monetary policy, but it is possible that the direction of the broader economic policy will be more about tweaks to Abenomics,” said Aoki of UBS Sumi Trust Wealth Management.
