Abe’s first pick in BOJ board rejig to test inflation resolve

Bloomberg

Japanese Prime Minister Shinzo Abe’s upcoming choice of candidate to join the Bank of Japan (BOJ) board could shed light on the leader’s current thinking on the importance of achieving a stubbornly difficult inflation goal.
Abe’s nomination to replace Yutaka Harada is scheduled to take place on Tuesday morning, according to a document seen by Bloomberg. The choice will be closely watched by investors and economists trying to gauge the depth of the prime minister’s commitment to hitting 2% inflation, seven years after setting that goal.
Most economists expect Harada to be replaced by another like-minded reflationist committed to achieving the price target. But if Abe opts for a candidate who shows more concern over the costs of the BOJ’s massive easing programme that could further reduce the likelihood of the central bank adding to its stimulus.
This year the BOJ faces one of its biggest leadership shakeups since Governor Haruhiko Kuroda took the helm in 2013. Two out of nine board members and several senior officials will probably be replaced over the coming months in moves that will help shape the thinking of the BOJ amid growing speculation its next eventual move will be to normalise policy.
Harada, a consistent dissenter to board decisions, will end his five-year term on March 25. Yukitoshi Funo, a former Toyota executive, will also step down at the end of June, and would typically be replaced by another representative of corporate Japan.
“The replacement of board members offers an extremely important clue to the future policy path of the BOJ,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance. “Choosing a non-reflationist to replace Harada would basically mean the government has thrown in the towel.”
In other words, the BOJ wouldn’t expand its easing as long as the yen doesn’t surge, he added.
Since last year, Abe has been signalling that achieving 2% inflation is not the be-all and end-all of his Abenomics policy platform to restore stable growth to Japan. For the first time since he returned to the premiership in late 2012, Abe last week didn’t even mention deflation in an annual speech at the start of the legislative
session.
While Harada isn’t as gung-ho as fellow board member Goushi Kataoka about the need to expand the BOJ’s stimulus, he is committed to the target over the longer term and sees a premature raising of rates as counter-productive.
Some 76% of BOJ watchers expect another reflationist to succeed Harada, according to a Bloomberg survey, though there is no strong consensus over who Abe will tap. Yasuyuki Iida, an associate professor at Meiji University in Tokyo, was mentioned by three economists in the survey. Other names mentioned included Yuji Shimanaka, chief economist at Mitsubishi UFJ Morgan Stanley, and Etsuro Honda, a former economic adviser to Abe.
“Given the current inflation rate and especially the trend of consumer spending after the sales tax hike, the candidate should be someone who agrees on the need to continue with easing. That is a given,” said Honda, who has influenced Abe’s selection of BOJ board members in the past, in an email to Bloomberg.
Honda didn’t comment on his own potential candidacy.
“Someone who is in a hurry to exit easing is out of the question,” Honda said, adding that Abe had a clear understanding of this point.
Still, not everyone expects a like-for-like replacement.
Hideo Kumano, chief economist at Dai-ichi Life Research Institute and a former BOJ official, said he expects the government to use the appointment to signal a move away from its reflationist stance and reduce opposition on the board.
“The government likely wants to avoid having someone who is always opposing decisions because always having two dissenting votes can been as a sign of the BOJ governor’s waning power,” he said.