The Japanese media are widely reporting that Governor Kuroda will be reappointed, which surprises very few people, as he is a trusted ally of Prime Minister Abe and has maintained a super-aggressive and highly unorthodox monetary policy as a part of Abenomics. Achieving a core CPI of 2% YoY has eluded him, but it is nearly impossible to achieve such with its housing rent component continuing to decline. Indeed, the Core US CPI ex shelter is running only at 0.7% YoY, not far above Japan’s Core (ex Food and Energy) CPI, and Japan’s CPI ex shelter is actually rising at a 1.2% YoY rate. The only major question was his age (73), but he seems quite healthy and is a man of great energy and willpower, so he was willing to carry on. Whether he wishes to finish his new five-year term is open to question, so the choice of Deputy Governor will likely be important.
In this regard, there are strong indications that Mr. Amamiya, currently Executive BOJ Director, will be selected for one of the two Deputy Governors positions, his being the one that is always held by BOJ professionals. He has been Kuroda’s right-hand man in implementing the unorthodox policies among the normally conservative BOJ ranks and banking industry; not an easy job, indeed.
Meanwhile, Mr. Etsuro Honda, the former other main contender for Governor, is leading the pack for nomination for the Deputy Governor position held for academic professionals (he is a former Ministry of Finance leader, not an academic, although he has been the key founder of the tenets of Abenomics, including loose monetary policy). His appointment would likely lead to a decent amount of friction on the BOJ board, with him and another uber-dove, Mr. Kataoka, pushing hard against any decrease in accommodation. Kuroda and Amamiya, who as a long-time BOJ professional and, thus, of less dovish character, will likely prevail, however, in setting BOJ policy as they see fit. For this reason, it now seems that if Kuroda does not finish his term, Amamiya would take over. There is also a tradition that Ministry of Finance officials (Kuroda was one) and BOJ officials alternate in heading the BOJ. Much, however, clearly remains to be seen before any prediction can be made confidently. Indeed, Kuroda may even last all five years.
With central banks globally becoming much less dovish, it will be very hard for Kuroda not to join this trend lest Japan be accused of trying to gain forex advantage. Indeed, all central banks are not hitting their inflation targets, and yet are removing emergency level accommodation, so the BOJ will likely have to, as well. The market also expects a hike in the BOJ’s 10-year JGB target, under the Yield Curve Control policy, from “around zero” sometime this year, so such would not be a major surprise even if it came midyear. The question of what to do about its Equity ETF purchase program also hangs over the BOJ. The monetary effect of reducing it would not be major, but the stock market might not be pleased in the short run. Besides convincing the general public to diversify into stocks for long-term investment, corporate earnings growth is the key to the stock market performance, however, and as such continues to power forward. Also, even if bond yields rise a bit, they will likely remain extremely low and provide much valuation cushion for equities, especially with dividend yields extremely high relative to bond yields.
Lastly, Kuroda’s reappointment makes the VAT hike in October 2019 even more certain than it already was (as Abe has already promised to spend its proceeds) because Kuroda supports the hike, whereas Mr. Honda, likely would not. This is positive factor for the perception of the sustainability of Japan’s debts. There are also several factors which should make this VAT hike less traumatic than the last one that pushed Japan into recession: the hike is only 2% instead of 3%, it is happening right before the excitement of Japan’s 2020 Olympics, which should prevent consumers from becoming too negative, and the economy is likely to be on much firmer ground, with much less fear of deflation, than in 2014.
