Who Will Be The Next Head Of The Bank Of Japan?

In a surprise announcement, BoJ Governor Shirakawa announced that he will step down on 3/19 (a month ahead of schedule) and while Barclays notes that there had been talk at one point that Mr Shirakawa might step down in a bid to protect the BoJ’s independence in response to Mr Abe’s threats to revise the BoJ Act; the decision, however, appears to have been motivated by policy considerations (the desire to have the governor and deputies start together). At a time when Japan’s stockmarkets are celebrating JPY weakness, Mr Shirakawa’s move provided yet more bounce as the new BoJ leader is expected to be even more dovish. Abe's push for a new governor, however, is meeting resistance from his own cabinet and financial bureaucrats, who fear extreme measures from the central bank may trigger a damaging rise in bond yields. The tussle, which Reuters notes, is testing Abe's resolve, but lies between a slightly less dovish bureaucrat in Toshiro Muto (favored by the opposition) and a banker, Haruhiko Kuroda, who is a front-runner in Abe's camp. With Draghi's comments today, we suspect Abe will err on the side of uber-dovish to fight the currency wars alongside him.


The four front-runners:


The Economist notes,

Mr Shirakawa’s decision, which caught even his BoJ colleagues by surprise, enables Mr Abe to appoint a new governor on the same day as two deputy governors. BoJ-watchers say there are three names prominently in the frame to replace him, all of whom share Mr Abe’s belief in bold monetary easing.


Mr Iwata, 66, is widely considered the most dovish of the [four]; he supports big purchases of Japanese and foreign bonds to cheapen the yen and bolster the economy.


According to a recent poll in the Nikkei, Mr Muto, 69, is the favourite among Japanese market participants (though an earlier nomination was blocked by a hostile upper house of parliament in 2008, when Mr Shirakawa got the job) - though he appears to be the least dovish (of an admittedly uber-dovish group)

However, as Reuters reportsMuto may not satisy Abe's dovishness and desire for a non-bureaucrat,

"Abe will have the final word." It is virtually a given that whoever takes over in coming weeks as head of the Bank of Japan will pursue monetary easing with more vigor than outgoing governor Masaaki Shirakawa.




At stake is how far the new BOJ chief will be prepared to push the central bank into untested policy waters in answer Abe's call for an all-out assault to break Japan out of years of grinding deflation and its fourth recession since 2000.


It is up to Abe and his cabinet to put forward a candidate to replace Shirakawa and his two deputies on the nine person board. That is expected by the end of this month.


Abe is keen to maintain the momentum behind his economic prescription - dubbed "Abenomics" - and appointing an outsider with unorthodox ideas could accomplish that.


"Abe has said he wants someone who can drive the BOJ into taking unprecedented policy steps. It wouldn't make sense for him to choose an ex-bureaucrat,"

And so Barclays believes that Kuroda is more likely:

We believe Haruhiko Kuroda is the most likely candidate to become the next governor as he meets the three conditions set forth by Finance Minister Aso in January and reiterated today (5 February):


1) organizational management experience;


2) competent (English) language skills; and


3) good health to meet the tough demands of the job.


The first condition suggests the new governor will not be an academic, while the third tends to eliminate elderly candidates. However, we do believe an economist (perhaps Takatoshi Ito or Kazumasa Iwata) could fill one of the two deputy positions.


If Mr Kuroda becomes the new governor, we believe the possibility of additional monetary easing will strengthen. Given his views outlined in the table below, we believe likely moves could include:


1) an expansion of JGB purchases in 2013 under the Asset Purchase Program (APP) with an extension in the residual maturity to 1-5y from the current 1-3y;


2) an increase in the target for buying risk assets, especially corporate bonds; and


3) an expansion in the amount of JGBs purchased in 2014 under the open-ended method, which was newly introduced on 22 January together with the 2% price stability target.


In our view, the possibility of foreign bond buying remains relatively low. But if such operations were introduced, we believe it would take the form of regular monthly purchases of a fixed amount in order to downplay any interventionist overtones.

Prime Minister Abe will nominate a new governor around the 15th of this month, according to the Nikkei newspaper. The appointments of the governor and his deputies must be approved by both the Upper and Lower Houses of the Diet. The ruling parties hold a majority in the latter, but not the former.

As Reuters concludes,

To get his candidates approved in the upper house, Abe needs votes of the opposition Democratic Party of Japan or, failing that, a combination of votes from smaller parties.


The divergence of views among the parties limits chances of dark horses like Kikuo Iwata and Ito winning the nomination, though they could land the deputy governor posts, analysts say.


"I don't think dark horse candidates will get approved by parliament. I think the government will play it safe this time and try not to disrupt markets,"