Selection of a new central bank governor is often the subject of a guessing game about potential nominees. In the case of the Bank of Japan, just about everyone got it wrong – which raises questions about what went on behind the scenes that led to the nomination of Kazuo Ueda.
Masayoshi Amamiya, a BoJ deputy governor, was widely reported to have been approached by Prime Minister Fumio Kishida’s government to succeed Governor Haruhiko Kuroda whose, ten-year term ends on April 8.
When Ueda was selected, Amamiya told local media he had declined the post for a “number of reasons”.
Hiroshi Nakaso, a former deputy governor, was also seen as a strong contender. But days before nomination was expected, he announced that he was becoming head of the APEC Business Advisory Council, thus ruling himself out of contention.
Ueda is an academic economist, unlike most BoJ governors who are drawn from the ranks of the central bank or the finance ministry. He did serve for a time on the BoJ’s policy board. A common assumption was that Kishida simply wanted a more “neutral” choice.
The last-minute reshuffling among those seen as the most likely candidates reflects internal political and monetary dynamics. It also appears to have happened with an eye to external market forces seeking to bring BoJ into line with global peers that have been raising interest rates to fight inflation.
Kuroda’s policies over the past ten years were aimed ostensibly at ridding Japan of decades of disinflation and deflation and achieving a target inflation rate of 2% via a yield curve control through purchases of government bonds and other securities.
In late 2022, the yen fell to a three-decade low of 150 to the US dollar and appeared set to go lower on widening interest rate differentials with other major currencies. While major global central banks were fast hiking rates, Kuroda held fast to near zero rates.
Hedge funds and others began building large short positions in the yen in the belief that the yield and trade deficits were unsustainable, and BoJ was forced to step up government bond purchases in order to preserve yield curve control. Even the International Monetary Fund urged the BoJ in February to adopt more flexible monetary policy.
With Kuroda’s term coming to an end and Kishida not committed in the way that former Prime Minister Shinzo Abe was to an alliance with the central bank to end deflation at all costs, the search was on for a new governor who would tighten policy and move into line with market pressures.
Amamiya, a Kuroda confidante, was reportedly unhappy with early unravelling of the existing order and Ueda was chosen instead, subject to parliament’s approval. He talks of the need for policy continuity, but also acknowledges the distorting impact of Kuroda’s policies on Japan’s bond and financial markets.
Ryozo Himino, former commissioner of the Financial Services Agency, and Shinichi Uchida, executive director of the BoJ, have been nominated as deputy governors.
