MNI BOJ INSIGHT: Kuroda Fate Uncertain; Ex-MOF Candidates Eyed

By Hiroshi Inoue

     TOKYO (MNI) - Prime Minister Shinzo Abe may well reappoint current Bank of

Japan Governor Haruhiko Kuroda for another five-year term next April but he will

turn to a replacement with international background if he judges the central

bank needs to refresh its image after four years of aggressive easing have so

far failed to boost zero inflation to a stable 2%, MNI understands.

     Technically, Abe can ask Kuroda, 72, to continue pursuing the reflationary

economic policy approach aimed at overcoming deflation and achieving the BOJ's

2% price stability target, goals that the two men share. Given the ruling

coalition's majority in both chambers of the Diet, the re-nomination would

likely to be approved easily.

     Earlier this year, Abe said in parliamentary testimony that he has

"complete trust" in Kuroda's skills as a central bank chief, based in part on

his having served as a senior Ministry of Finance policymaker and having managed

a large international organization. In 2013, Kuroda cut short his term as the

president of the Manila-based Asian Development Bank and returned to Tokyo to

become BOJ governor.

     However, whether Kuroda, whose terms ends April 8 next year, will be

reappointed remains uncertain, in part due to uncertainty about the outlook for

Abe's government.

     Abe is now expected to survive the recent slump in public support for his

government and seek an unprecedented third term as the leader of the ruling

Liberal Democratic Party in September next year. But some opposition parties

could join forces to challenge the majority the LDP and its small coalition

partner hold in the Lower House if Abe were to dissolve it and call a snap

election, as some political observers have speculated.

     The next election of the Lower House must be held by mid-December 2018. All

of the seats, which will be reduced to 465 from the existing 475 in a reform,

will be up for grabs. The LDP currently holds 288 seats and its partner Komeito

35.

     No ruling party politicians have openly called on Abe to step down but

there are some LDP officials who are unhappy with Abe's performance, including

on economic policy, a person familiar with thinking at the BOJ and the LDP told

MNI.

     In July, the LDP suffered a stinging defeat in Tokyo metropolitan assembly

elections, in part due to the scandals that have surrounded Abe's government.

Opposition parties have charged that Abe showed favoritism to a close friend

over plans to open a veterinary faculty in a special deregulation zone as part

of the government's growth strategy. Public anger also grew over a scandal

involving the Defense Ministry.

     Abe's critics have said he has been too arrogant in policymaking at the

national level -- taking advantage of the governing coalition's legislative

majority to rush through passage of controversial security bills.

     The source suspects that Abe's reappointment of Kuroda may be his plan B in

case his pick of Kuroda's successor were to be criticized from within his own

party. Some LDP politicians are already unhappy with Abe's appointments of close

allies to key positions, he said.

     The Prime Minister's Office looks for candidates based on Abe's preference

and advice from his aides. The ideas are shared with senior policymakers of the

ruling parties.

     Nobuyuki Nakahara, 82, a BOJ policy board member from April 1998 to March

2002 who has close ties with Abe, appears to be recommending that the prime

minister replace Kuroda, another source familiar with government thinking told

MNI.

     Nakahara will have a strong influence on Abe's decision on the BOJ

governor, the source said.

     Nakahara seems to be suggesting to Abe that he should appoint Etsuro Honda,

62, a key economic adviser to Abe who is currently Japan's ambassador to

Switzerland, to head the BOJ, this person said.

     Honda was among the economics professors who advised Abe during the 2012

Lower House election campaign that returned Abe to power. Honda argued then that

raising the amount of money available for economic activity through expansionary

monetary and fiscal policies should correct the strong yen and help the nation

overcome deflation, a policy approach Abe adopted.

     Honda served in the Ministry of Finance for 34 years, holding posts at the

department that overseas debt issuance and at the research institute. He was

often seconded to the Ministry of Foreign Affairs. After retiring from the MOF

in 2012, he became an economics professor at Shizuoka University.

     Another possible candidate to succeed Kuroda is Takatoshi Ito, 66, a

professor of international and public affairs at Columbia University. When

Kuroda was the vice finance minister for international affairs in 1999, Ito was

his deputy. Ito has the added advantage of being well-connected with economic

leaders around the world.

     Ito's expertise is in international finance and macroeconomics, on which he

has advised the Japan government. From 2006 to 2008, he served as a member of

the Council on Economic and Fiscal Policy chaired by the prime ministers at the

time (one of whom was Abe).

     If Abe were to pick Kuroda's successor from among career central bankers,

there are two strong candidates, MNI understands.

     Hiroshi Nakaso, 63, is one of the two deputy BOJ governors under Kuroda. He

has supported Kuroda's reflationary approach since the BOJ launched aggressive

easing in April 2013. Fluent in English, Nakaso has deep knowledge of

international financial issues.

     Masayoshi Amamiya, 61, is the BOJ executive director in charge of monetary

policy. He has been responsible for drafting many of the bank's monetary policy

measures, including the policies on quantitative and quality easing and negative

interest rates.

     Should Kuroda be reappointed, either Ito or Honda, both outsiders to the

BOJ, could become one of the two deputy governors at the central bank and

Amamiya would be a likely choice for the other deputy.

     If the next BOJ governor comes from outside the bank, one of the two

deputies' positions would be filled by a career central banker to maintain the

balance of policy-making experience on the nine-member BOJ board, sources said.

     If current BOJ deputy Nakaso were to be promoted to governor, the two

deputy governors would be likely to be picked from among BOJ outsiders, such as

Honda, Ito and Nobuchika Mori, currently commissioner of the Financial Services

Agency, the government watchdog of the financial industry. Mori is seen as

having the trust of Chief Cabinet Secretary Yoshihide Suga, a close ally of Abe.

     Whomever is appointed as the BOJ governor next year, the person will

inherit the difficult task of lifting near-zero inflation to a stable 2%, a

condition Japan has never achieved.

     At the same time, the appointment of a new BOJ governor could give a good

opportunity for BOJ staff to review the bank's policy framework. Last September,

the bank shifted its focus to keeping borrowing costs low to support growth and

inflation by maintaining a flat yield curve -- the current yield control policy

-- from the previous goal of controlling the amount of cash it injects into the

financial system.

     "The worst case would be to see somebody more dovish than Kuroda take

office," argued a third source familiar with BOJ thinking. "If such a person

became governor, monetary easing would be reinforced to achieve the 2% inflation

target."

     The person added that the BOJ's struggle to achieve the 2% inflation target

has been a protracted battle with patience, as the central bank refrains from

conducting more easing unless the momentum toward the target were to fade

significantly.

     The source worried that Honda would consider increasing the scale of the

BOJ's Japanese government bonds purchases because he, along with other

reflationary-minded economists, believe that the BOJ still has room for further

monetary stimulus. Other economists have warned that any increase in the already

huge stock of assets on the BOJ's balance sheet would make the eventual exit

from aggressive easing more difficult.

--MNI Tokyo Bureau; tel: +81 90-2175-0040; email: hiroshi.inoue@marketnews.com

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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