BOJ Watchers Flag Outside Risk of March Surprise to Help Ueda
(Bloomberg) — Bank of Japan watchers are flagging the outside risk that Governor Haruhiko Kuroda may surprise international markets one last time next month with adjustments to smooth the transition process for his nominated successor Kazuo Ueda.
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The central bank’s yield curve control program already presents a complicated challenge for Ueda. As soon as he takes the BOJ’s helm, the nominee will likely face intense market pressure for change, even if he may prefer to take time to carefully assess the past decade’s extraordinary stimulus measures as an economist.
That’s why some BOJ watchers warn there’s a risk of a surprise at Kuroda’s final meeting ending March 10. Most economists see action coming after Ueda takes the helm.
“It depends on market developments but I see a 50-50 chance” that the BOJ’s target yield band is widened again in March so the new leadership can examine policy in a calmer environment, said Ryutaro Kono, chief Japan economist at BNP Paribas SA.
If the BOJ doesn’t move next month, Ueda may face “massive bond selling” before his first meeting, Kono added.
So far Kuroda has said there’s no need for further YCC adjustments following December’s tweak. But the governor is likely aware of the dynamics at play and the risk of an awkward start for the new governor.
Economists flagging the risk think that Kuroda could still decide to help give Ueda more time to think as he and Deputy Governor Masayoshi Amamiya consider the most appropriate way to finish their terms.
Ueda’s surprise selection as Prime Minister Fumio Kishida’s pick for BOJ chief has prompted economists to bring forward their forecasts for some kind of tightening step. Some 70% of respondents in a Bloomberg survey now see that happening by July, compared with 54% last month.
Ueda took the unusual step of telling reporters that monetary easing needs to continue on the day news broke of his likely nomination, but before it was officially announced. The veteran professor of economics said he wanted to make decisions logically, and offer clear explanations.
Many investors and economists hold the view that any change to the central bank’s yield control has to come as a surprise to avoid triggering a bond selloff ahead of it. Leaving that delicate call to Ueda right at the start of his leadership may be something the BOJ wants to avoid, according to BNP Paribas SA and Oxford Economics.
A look at the options market also shows traders see the March BOJ meeting as the next big catalyst for potential swings in the yen, according to implied-volatility data compiled by Bloomberg. Still, the figures show expected moves in the currency are below levels seen before the January meeting.
Since the December move there’s been little clear improvement in the functioning of the bond market, providing speculators with another reason to expect more action sooner rather than later.
The poll showed that economists see action on yield curve control as more likely than the short-term interest rate. Expectations that the central bank will exit from its negative interest rate as its first move have halved since news of Ueda’s nomination came out. Only 15% of economists see the BOJ raising its short-term rate first, as many view Ueda as concerned about premature tightening.
“Mr. Ueda won’t hurry to unwind policy,” said Tetsuya Inoue, who was Ueda’s secretary when he was a BOJ board member in the early 2000s and voted against raising interest rates from zero. “He will normalize policy only after confirming a rise in inflation and wage growth in a self-sustaining manner.”
These days, Inoue is a senior researcher at Nomura Research Institute. Based on his experience working with Ueda, Inoue lauded his ability as a communicator.
Those communication skills will be put to the test during Ueda’s first parliamentary hearings Friday, with markets keenly focused on how he assesses the control of yields.
Most BOJ watchers see problems in the central bank’s communication strategy after Kuroda’s surprise widening of the yield band in December. That move that appeared to contradict earlier comments that it would be equivalent to raising interest rates and harmful for the economy.
By weighing the importance of continuing with easing on the one hand and improving market functioning on the other, Ueda may initially take care of the side effects of yield curve control, then consider the overall package, said Shigeto Nagai, head of Japan’s economic research at Oxford Economics.
“Ueda may choose to fix the YCC problem first,” Nagai said. “Or Kuroda may choose to take care of it by himself before he leaves. That would be a great gift for Ueda.”
–With assistance from Sumio Ito and Cormac Mullen.
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