Japan’s LDP race throws wrench in BOJ preparations after Kuroda
Japan’s next prime minister will have to appoint a replacement for BOJ governor Haruhiko Kuroda, who since spring 2013 has been leading an aggressive yen printing operation as he seeks to bring the country’s stubbornly stable inflation rate to 2 %.
Who will replace Kuroda is a question that has annoyed Yoshihide Suga since he became Prime Minister a year ago.
Almost immediately after replacing Shinzo Abe as prime minister, Suga asked Deputy Prime Minister Taro Aso, who is also finance minister, “What do you think of the BOJ governorship? Suga received names for the job until early this year.
More recently, he announced that he would effectively step down as chairman of the ruling Liberal Democratic Party and therefore prime minister of Japan. This means he’s also stepping away from the task of figuring out who will guide the BOJ through the post-Kuroda era. That burden will fall on Suga’s replacement, who will be identified on September 29, when the PLD holds its presidential election.
Suga had promised to continue the Abenomics policies of his predecessor, which are based on massive monetary easing. With Suga’s departure, however, the market will predict what the next administration’s approach to monetary policy might be.
The next prime minister is unlikely to insist that the current monetary easing be immediately reversed, but a different reflection on the current situation in the medium to long term will inevitably emerge.
Administrative Reform Minister Taro Kono, the main candidate in the PLD race, seems skeptical that easing the BOJ alone is enough. “[Inflation] will result from economic growth, ”he said. “It’s pretty hard to see how this can happen under the current conditions. … It is important for the BOJ to communicate well with the market. “
Another competitor, Fumio Kishida, seems to be wondering if it’s time to start thinking about an exit strategy. “It is important to look at the situation in other countries when looking to the future,” he said. In his application for this post in 2020, he mentioned the side effects of the current monetary policy, such as the deterioration of the profits of financial institutions.
Sanae Takaichi, a third candidate, said the government’s fiscal consolidation target will be put on hold until Japan hits 2% inflation.
Market participants believe that the LDP election debate could provide an opportunity to re-examine monetary policy, as well as “offer a clearer picture of who a new prime minister would consider as BOJ governor,” said Yuji Saito of Credit Agricole Bank.
The new prime minister will also have to complete the duties of the current administration – namely how to handle the political agreement released by the government and the Bank of Japan in January 2013. The joint statement was issued soon after taking office. ‘Abe in December 2012, and it has remained unchanged for the past eight years.
The document says the government and the BOJ will improve their policy coordination to achieve 2% inflation “as soon as possible”. Unlike central banks in the US and Europe, which have started to scale back their quantitative easing amid inflation fears, the BOJ’s 2% target remains out of sight.
In fact, the Ministry of Finance and the BOJ discussed revisions to the document, which remained official policy only in name, when the post of prime minister changed in 2020.
Officials involved said they must be prepared to act if the prime minister gives the floor, and that the change in leadership offers a chance to change the statement. Ultimately, however, Suga decided to leave the document unchanged.
The Nikkei Stock Average had fallen to around 16,000 yen in March 2020 due to the coronavirus pandemic, but by September it had fallen back to around 23,000 yen, close to its pre-pandemic level. “We didn’t want to create chaos by issuing a new statement,” a senior government official said.
Markets will be watching closely if the next administration issues a new joint statement that clarifies its position on monetary policy.
A number of variables will also affect who becomes the next BOJ governor. First, the dynamics within the LDP will play a role. Abe, who wields strong influence in the Hosoda faction, the largest of the PLD’s intra-party groups, supports further easing. The results of the PLD leadership elections and lower house elections scheduled for this fall will determine whether the new prime minister will have a free hand in the choice of personnel.
Another factor is the election of the upper house next summer. Whatever the outcome of the lower house elections, a “crooked parliament”, in which the two Diet houses have different majorities, will come back. In 2008, the government’s plan to appoint a new BOJ governor was twice rejected by the upper house, and for the first time since the end of World War II, the post remained vacant for three weeks.
Monetary easing halted the appreciation of the yen, leading to a rebound in corporate profits and higher stock prices, but its limits have become clear. The upcoming lower house elections will give the ruling coalition and opposition parties a chance to lead productive political debates for post-pandemic Japan.