HONG KONG, Feb 14 (Reuters Breakingviews) - Academic Kazuo Ueda faces a rocky time as the new governor of the Bank of Japan (8301.T). He is respected but as an outsider lacks factional support within the financial bureaucracy and faces an unpopular prime minister pushing an expensive agenda.
Departing boss Haruhiko Kuroda’s decade atop the BOJ included helping then-Prime Minister Shinzo Abe implement his radical stimulus programme known as Abenomics that successfully ended the country’s long deflationary era. He is stepping down just as his signature yield curve control (YCC) policy is becoming increasingly unsustainable as domestic inflation rises. Addressing that is just the first item on Ueda’s long, complicated to-do list.
This may help explain the trouble the government had finding a replacement. The Nikkei news service reported that officials had approached Deputy Governor Masayoshi Amamiya and were rebuffed. There were other insider candidates, but Tokyo went with Ueda, who served with the BOJ before but is not a career central banker.
It seems likely Ueda will have to modify or abandon YCC given how much damage it is doing to the bond market and the BOJ’s balance sheet. But he is unlikely to start normalising rates outright given the anemic nature of the recovery in the last quarter; in 2000 he dissented from the BOJ’s ill-advised decision to hike.
Market reactions to his appointment are mixed. The yen has begun softening again, now trading around 132 to the dollar, while the 10-year sovereign bond continues to hug the top of its allowed trading band around 0.5%. The Topix equity index is more or less flat.
The question is whether Ueda will work effectively with other parts of the government, in particular the Ministry of Finance, and improve the BOJ’s independence, which has been reduced during the Abenomics era. Prime Minister Fumio Kishida wants to boost defense spending alongside other stimulus programmes and needs to find the money for it. But government debt already equates to more than 200% of annual output in a barely growing economy that is smaller in current U.S. dollar terms than it was when Abe took power in 2012.
In a recent television appearance Ueda noted that “it's important to make various decisions logically and explain them clearly". That is mildly reassuring to markets, given the importance of communication. Beyond that, though, they will have to sit and watch how this dark horse runs.
CONTEXT NEWS
Japan's government on Feb. 14 named academic Kazuo Ueda as its pick to become the next governor of the country’s central bank. Ueda, a 71-year-old former Bank of Japan policy board member and an academic at Kyoritsu Women's University, will succeed incumbent Haruhiko Kuroda, whose second five-year term ends on April 8.
Japan's economy rebounded much less than expected in the three months to the end of December, growing at an annualised rate of 0.6% after contracting slightly the previous quarter.
