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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
[TOPICS: MMJBJI,MMJBJ$,M$A$$$,M$J$$$,MC$$$$,MT$$$$,MX$$$$,MGJ$$$]

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