Alone among major central banks, the Bank of Japan has stuck to its ultra-loose monetary policy as inflation has risen. Will its new Governor shake things up?

• The Bank of Japan will shortly have a new governor
• With inflation rising, other central banks have raised interest rates sharply
• But the BOJ hasn’t, and a new boss is unlikely to change that

When any major central bank needs a new governor, media sources pour over every public word that candidates have ever said or written, desperate for an early steer as to what sort of policy they might pursue once behind the big desk.

That’s understandable enough from one angle. Interest rate decisions made at a handful of central banks underpin market action and the pricing of trillions of dollars in different instruments, from currencies through commodities and on to complex derivatives. Even more basically, higher rates usually mean more demand for a currency, with lower rates a reason to sell. So, again, it’s natural that markets should want as much information as they can get, especially if a new governor might be likely to change a long-standing policy.

Surely then, the mind of a central bank chief matters, perhaps (say it softly) even more than that of many elected politicians.

Hawkish or Dovish?

But a simple judgement as to whether an incoming governor is likely to be “hawkish” – inclined to tighter monetary policy – or “dovish” – prone to monetary largesse – is really of debatable use. Markets may love simplicity where they can get it, but there’s a lot of nuance at work here.

For one thing, economic circumstance must dictate what central bank governors do within their mandates. For another, monetary policy is set by committee. The art of being a good governor is not to be dogmatically hawkish or dovish, but to be on the winning side at every policy meeting. And that is quite an art.

No one in the Bank of Japan’s eventful history has practiced it for so long as outgoing Governor Haruhiko Kuroda. He will leave office on April 8, the longest-serving Governor in BOJ history, ending a journey which began back in March 2013.

His successor will almost certainly be Kazuo Ueda, a 71-year-old academic, formerly a member of the BOJ’s monetary policy board. He remains subject to parliamentary confirmation but seems overwhelmingly likely to get it and to take the helm when Kuroda steps down.

His rise has surprised some. In the hierarchical world of Japanese finance, it was a surer bet that a BOJ lifer would follow Kuroda. Is the advent instead of a comparative outsider a sign of imminent revolution in policy? Is the huge stimulus, ultra-low interest rates and yield-curve control of the Kuroda era about to be swept away?

Well, probably not, no.

The Bank of Japan Faces Unique Challenges

The Bank of Japan faces challenges that no other central bank does. With demand in its home nation moribund for decades the central bank has for years been using monetary policy to try and get it going.

The BOJ wants inflation running sustainably at a 2% annualized rate before it will try to wean the country off low borrowing costs and tiny bond yields. Before a wave of global inflation swept over Japan last year it was having debatable success.

Now domestic inflation is running at forty-year highs, although the fact that even these are only a little over 4% should tell you all you need to know about the underlying state of demand in Japan.

And if it doesn’t, consider this. Among major central banks the Bank of Japan has not raised interest rates in response to rising prices. Indeed, the key short-term interest rate has been stuck at minus 0.1% since 2016, having fallen through the 0.0% barrier early that year. The BOJ also maintains a policy of “Yield Curve Control” (YCC) to keep longer term interest rates down. This involves buying essentially unlimited quantities of Japanese government securities.

And years of this has so far failed to buy the BOJ the internal demand it wants.

In truth, almost all of the inflation uptick we’re now seeing is imported. Mr. Kuroda knows this and so, judging by his testimony to parliament last week, does Mr. Ueda.

“Japan’s inflation trend is likely to rise gradually. But it will take some time for inflation to sustainably and stably achieve the BOJ’s 2% target,” he said.

Students of the BOJ will find this sort of talk somewhat familiar. We will hit our target, but it’s not going to happen soon. This is very much the Kuroda line.

Whatever Ueda’s private leanings, he is as hamstrung by circumstance as any central bank leader in the world. He offered a modest curveball to central bank watchers by suggesting that the BOJ should be ‘creative’ with its monetary policy and pursue interest-rate normalization if it can sustainably hit that inflation target.

But the word ‘if’ is doing a huge amount of heavy lifting there.

Those attuned to the fortunes of the Japanese Yen should probably not expect big changes once he takes charge. There may be some evolution at Ueda’s BOJ, but revolution is too much to expect.

—By David Cottle for DailyFX