A strong possibility that BOJ policy will be carefully amended after the new Governor takes office

Despite reports that the government has approached BOJ Deputy Governor Masayoshi Amamiya about becoming the central bank’s next governor, there are still lingering uncertainties, with Finance Minister Shunichi Suzuki telling reporters that he had not heard anything about the nomination and was “out of the loop”, for instance.

The financial markets have had a relatively favorable reaction to the media coverage. They’ve taken the news as a sign that if the current Deputy Governor assumes office as the next Governor, a certain degree of policy continuity will be maintained, meaning there will be little uncertainty over the BOJ’s future policy stance.

However, the notion that the bank’s current extraordinary monetary easing stance will remain intact is likely quite a minority view. The majority viewpoint is that under an Amamiya administration, the BOJ will gradually and carefully proceed with adopting a more flexible and normalized monetary policy. The chances of that happening would actually seem to be high.

In order to prevent any anticipated policy changes from violently rattling the financial markets, the next BOJ Governor will—at least initially—probably stress that a change in leadership won’t mean an abrupt shift in the bank’s policies. Nevertheless, given that under Governor Kuroda the BOJ has pursued what could be termed “de-facto normalization” in the form of greater policy flexibility, measures against side effects, and so forth (driven by the Secretariat), there’s a strong chance that the bank’s policies will be amended once the new Governor takes office.

Secretariat-driven policies have led to communication problems

Out of concern for the markets, the next BOJ Governor might very well emphasize in his communications, at least at the outset, that the monetary easing policies enacted under the previous administration will not significantly change for the time being. This will likely be intended to contribute to the stability of the financial markets, and in turn to that of the monetary system. On the other hand, if the BOJ were to move toward a more flexible and normalized monetary policy under such circumstances, it could create a new problem by making the bank’s policy intentions opaque to the financial markets and to the public.

This opacity in policy intentions is a major problem that has persisted for ten years during Governor Kuroda’s tenure. Under a Governor who’s been very proactive about monetary easing, the BOJ secretariat has pursued “de-facto normalization” through enhanced policy flexibility, measures against side effects, and the like, and it has therefore continually framed even its more retractive measures to amend this easing as steps forward. The measures it enacted last December to increase the allowable range of volatility in government bond yields under its Yield Curve Control program (YCC) would also seem to be similar in nature.

With the normalizing of communication, restoring public trust will be a challenge for the next Governor

In a sense, this kind of messaging and communication has created a broad perception among the public that BOJ policies or explanations are difficult to comprehend, which has likely led people’s trust in the BOJ to suffer.

It’s expected that for the first time in ten years, the BOJ will revert—both in name and in reality—to its traditional policy stance of making policy revisions with caution, out of concern for stability in the financial markets and financial institutions. In this context, it’s possible that at least early on after the new Governor takes office, the relationship between the BOJ’s policy intentions and its explanations will remain a complicated one. That could damage public trust in the new administration, and that uncertainty could also increase volatility in the financial markets.

What the new administration will need to do is to make its now exceedingly rigid monetary policies more flexible, and to normalize its extraordinary monetary easing program. Alongside that, normalizing its communications—that is to say, restoring confidence in its policies by being straight with the public about its policy intentions—will also be a major challenge.

• Takahide Kiuchi

  Executive Economist