MNI POLICY: Kuroda's Legacy Looms As Leadership Race Narrows

The Bank of Japan's shock move to lift the upper limit of its 10-year yield target has sharpened focus on the race to replace Governor Haruhiko Kuroda, with a key selection criteria being a commitment to maintaining low interest rates to support fragile growth and limit the government's borrowing costs, MNI understands.

Deputy Governor Masayoshi Amamiya and former Deputy Governor Hiroshi Nakaso are front-runners for the top job, but their ability to navigate a shift away from Kuroda's epoch of easy money will be constrained by the dependency of Japan's economy on accommodative monetary policy, as well as the political calculus of the unpopular Kishida government that is eager to rein in inflation without hurting growth.

The most difficult task facing the new governor is abandoning the BOJ's negative interest rate policy and yield curve control, a policy that caps the 10-year bond yield at 50bp after Tuesday's shock decision to lift it from 25bp. Both policies have produced adverse side-effects, such as a sharply weaker yen, and lack flexibility at a time when inflation is rising.

The deterioration in bond market functioning provided Kuroda with a convenient excuse to change the yield target band on Tuesday and signal a prospective broader tweaking of policy in 2023. The decision has provided a higher degree of flexibility for the new governor, who takes office on April 9. (See MNI BOJ WATCH: Kuroda Dismisses Shock Shift As Tighter Policy)

Prime Minister Fumio Kishida's views will be an important consideration in shaping the future of monetary policy given the final choice of governor will need his support. Kishida’s low approval rating means the government doesn’t want the BOJ to raise rates as it would increase the financial burden on households and businesses. The prime minister sees no need to accelerate the normalisation of the BOJ's easy policy

AMAMIYA VS NAKASO

Amamiya, who has served as Kuroda’s right-hand man, has consistently emphasised the need to maintain low interest rates to stimulate the economy. He has spent many years drafting signature monetary tools such as negative rates policy and yield curve control.

The BOJ veteran is well-acquainted with the nuance of Japan's unique monetary policy framework, meaning he has the skills and experience needed to make adjustments and minimise the risk of sharp movements in financial markets.

An Amamiya-led BOJ would likely be one of policy incrementalism. Easy money policy would not be changed immediately, though he may seek to enhance flexibility.

Rival contender Nakaso offers a stark contrast to Amamiya. He has criticised Abenomics and its heavy reliance on monetary policy, and has warned of the costs associated with prolonged easy policy. Should Nakaso be appointed the next governor, it would stoke speculation of an accelerated move towards adjusting easy policy and possibly spark heightened volatility in financial markets.

Candidates for governor and two deputy governors will be grilled by lawmakers after the government nominates them. Approval would then depend on voting in the Diet's lower and upper houses. Testimony by the Governor-elect will provide clarity on their outlook for monetary policy, including views on low interest rates and policy flexibility.

Former senior BOJ officials said there are preconditions that must be met before any change to policy can proceed. These include no sharp and significant fall in global growth, especially in the U.S., and that wages growth must be confirmed to be trending higher. If these conditions are not met, then any immediate shift in policy is unlikely, they said.