BOJ’s new governor ushers the end of Abenmoics

We think government’s pick of Kazuo Ueda as the next BOJ chief spells the end to economic policies of the late Shinzo Abe and his Abenomics playbook. To be sure we think his legacy in building a more assertive Japan, and to raise its defence spending has been fully embraced by the LDP. 

However, as we suspected and explained in our last week’s publication, Masayoshi Amamiya who was the market’s favourite for the top job will indeed not be the next Japan’s central bank governor. As it has been long reported, he didn’t want the job for understandable reasons given that he is the co-architect of Kuroda’s QE. 

So, while Kuroda-san rides into the sunset in April and having come out of his recent battles with capital markets relatively unscathed, Amamiya would have likely been blamed for any mishaps in moving away from his ultra-dovish stance which he even reiterated in last week’s parliament. His reported statement that “the next BOJ governor needs a new perspective on monetary policy” was also very interesting. 

Indeed, we continue to believe Japan has a big inflation problem brewing and those at BOJ who have ignored this in the past 12 months, calling it a temporary “cost push” will likely be facing a challenging period ahead. To be sure, BOJ has consistently underestimated the rate of inflation.  

As food prices of thousands of items are being raised again this month and electric power firms intend to jack up their charges by up to 45% next quarter, we think short-term fixes of government’s household subsidies which are in any event, unsustainable, is unlikely to mask rising prices that are being passed down, a trend fairly evident looking at Japan’s latest corporate earnings results. 

We also strongly argued that Japan’s ruling party wants to move away from Abenomics. With Abe-san having tragically passed, the heavy weight champion of the policy is no longer there and many party elders want to forge a different economic path. None more so than the PM Kishida-san himself who has long talked about a new type of capitalism and has called on Corporate Japan to raise their wages with impressive results thus far. 

Indeed, with wages also on the rise as Japan’s shrinking labour pool is leading to a severe shortage of workers post Covid, we think a consensus is quickly being formed, at least among larger corporations that hikes in salaries are needed and those that do not will stand out. We think this will also provide another big shock to BOJ’s current policy makers who are counting on a tepid wage growth outlook to justify their heavy-handed JGB market interventions.

We think Ueda-san is most unlikely to have any attachment to Kuronomics and will have to slowly dismantle YCC by allowing wider trading bands for JGB yields and tapering off its QE. We also think that Japan’s institutional investors would likely jump on better returns at home without the forex risks and hedging costs. Thus, fears of a major market dislocation stemming from the JGB yields spiking massively might be overblown.