Kazuo Ueda speaking during a Q&A session at the House of Representatives of the parliament in Tokyo on 24 February 2023. AFP.
Bank of Japan Governor Kuroda will retire after ten years in April along with his two deputy governors. The new governor will be former BoJ board member and academic Ueda and his deputies will be current BoJ Executive Director Uchida and former banking sector regulator Himino.
Source: Bloomberg, Bank of Singapore
The new BoJ leadership team is unlikely to immediately change Japan’s very low interest rates. Core inflation - excluding food and energy - has hit three decade-highs of 3.2% in Japan as the first chart shows. But Ueda agrees with Kuroda that the current bout of inflation, driven by more expensive imports, may still only be transitory. Thus, Ueda said last month "Japan’s inflation is led by cost-push factors … it will still take time to achieve sustainable inflation."
Source: Bloomberg, Bank of Singapore
The incoming governor also said: "the BoJ needs to firmly support the economy with easing." Therefore, when the new team starts, the central bank seems unlikely to raise its deposit rate from -0.10% or lift its target of keeping 10Y Japanese government bond (JGB) yields ‘around zero percent’ to stimulate activity and inflation.
As the second chart shows, the BoJ’s cap on 10Y yields, initiated in 2016, has been very supportive of Japan’s equities. But Ueda is likely to announce a comprehensive review of the BoJ’s policies. Incoming Deputy Governor Uchida told parliament: "I feel it would be more appropriate for a new leadership to take time, a broader angle and conduct a wide-ranging review."
Any review may take a year or so as Uchida said the BoJ could follow a similar time frame to the Federal Reserve’s and European Central Bank’s last major policy reviews. We also think the new leadership would not increase the BoJ’s deposit rate from -0.10% back to 0.00% even after a full review until core inflation settles around the BoJ’s 2% target. As the first chart shows, inflation has been below 2% for the last three decades.
However, investors may become unsettled by the risk any policy review could lead to the BoJ ending its cap on 10Y yields as rising inflation makes the policy unnecessary. That could cause JGB yields to spike hitting Japan’s equities while making the JPY jump. Thus, the risk of a less dovish BoJ keeps us neutral on Japan’s economic outlook in 2023.
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