BOJ incoming governor drops big hints of policy divergence

The first testimony in parliament by the incoming BOJ governor, Kazuo Ueda went reasonably well. He pledged his support for BOJ’s continued easing as one would have expected at his nomination hearing, showing respect for the current governor while also not wanting to create any turmoil in the JGB market before he takes over the role in April. 

However, we feel the general interpretations of his remarks which emphasised on this dovish tone had overlooked some key points in his speech which veered from the Kuroda narrative. His comments that he is hesitant to add wage growth to policy target is one big potential divergence as Kuronomics has been all about waiting for wage growth to come-which is materialising anyway. 

Most notable was his remarks that “right decision in BOJ policy is vital whether or not price goals are met” was likely hinting that he will be far more flexible in potentially being forced to tame Japan’s own inflation problem. This was further underlined by his stated understanding that BOJ’s yield-curve control (YCC) has led to a dysfunctional JGB market and has also played a part in weakening the yen, two major side-effects that Kuroda-san had tried to explain away.

Reading in between the lines, we think Ueda-san will try to dismantle YCC, either by moving the operations to the short end of the curve or simply giving 10-year yields lot more room to move in hope that domestic institutional are lured in by higher rates and the market will start functioning again. With Japan’s inflation gauge heading higher and closing in on our 5% target by March, we see BOJ tapering far sooner than many expect. 

This is especially so as inflationary expectations are rising once more both in the US and Europe and longer-term rates there are moving higher. With yen weakening again on one hand and BOJ’s yield ceiling being tested on the other, the pressure continues to build up for a major policy change by the new governor who has been courageous in taking on this task of dismantling this massive monetary policy experiment.