Amamiya is more circumspect than Kuroda vis-à-vis hyper-accommodative monetary policy

The Nikkei reported on the 6th that Japanese government official spoke with BOJ Deputy Governor Masayoshi Amamiya on the 5th about succeeding BOJ Governor Kuroda. The report’s veracity has yet to be confirmed and whether Amamiya would actually accept the post is unknown, but the news that Amamiya is under consideration for the job is not surprising given that he has been seen as the leading candidate to succeed Kuroda.

In response to the report, the JPY weakened one big figure, trading through 132 against the USD, in the Sydney FX market on the 6th. The yen’s move was likely fueled by speculation that an Amamiya-led BOJ would maintain status quo monetary accommodation or at least not normalize policy much. In actuality, however, the BOJ could very well shift to a more flexible policy stance or start normalizing policy even if Amamiya or another candidate becomes the next governor. After Kuroda departs, the BOJ executive staff is expected to orchestrate a policy recalibration, a process that would likely be smoother and more unified if the new governor is a BOJ insider or alum.

While Amamiya is seen as somewhat more dovish than the other two most frequently mentioned candidates, Hiroshi Nakaso and Hirohide Yamaguchi, both formerly deputy governors, he is considerably more cautious than Kuroda. The difference in policy stance between Amamiya and the other two leading candidates is minor in comparison to the gulf between him and Kuroda.

De facto normalization already underway, led by BOJ executive staff

The Kuroda BOJ’s aggressive easing was arguably confined to the first three years of Kuroda’s tenure. Under this view, the last major dose of easing delivered by the BOJ was the rollout of its NIRP in February 2016. When the BOJ launched YCC in September 2016, its presumptive motives were to (1) stabilize financial institutions’ earnings by halting long-term rates’ NIRP-induced sharp decline and (2) reduce its JGB purchases by switching its operational target from asset purchase quantities to an interest rate. Similarly, the policy tweaks that ensued from the BOJ’s March 2021 policy review were intended to mitigate side effects of prolonged unconventional monetary easing.

In other words, the BOJ executive staff is already spearheading de facto policy normalization in the form of more flexible policy settings and adjustments to mitigate existing policies’ side effects. The executive staff has much more influence over the conduct of monetary policy than is commonly thought. Once the new governor take the reins, the executive staff will be able to proceed with explicit normalization by expressly mapping out a policy pivot instead of continuing down the path of tacit normalization. The executive staff has likely long been pursuing such a policy pivot during Kuroda’s governorship.

BOJ may not start normalizing policy as soon as Kuroda departs

I expect the BOJ to lay the groundwork to lengthen its 2% inflation target’s timeline and conduct monetary policy more flexibly at its April Monetary Policy Meeting or relatively soon thereafter. It could further loosen its YCC parameters as well. However, it is unlikely to immediately start normalizing policy in earnest by exiting YCC and/or NIRP.

If expectations of early policy normalization widely take root in financial markets, the JPY may rapidly appreciate to the detriment of Japan’s economy. The new BOJ Governor may even stress that monetary policy will remain largely unchanged for a while. Historically, the pre-Kuroda BOJ typically proceeded cautiously with policy adjustments, carefully gauging their prospective implications for financial markets and financial institutions. The post-Kuroda BOJ will likely revert to such circumspection. Major moves toward normalization like exiting YCC or NIRP are unlikely until mid-2024 at the earliest. That said, the BOJ’s upcoming leadership succession will very likely prove to be a major turning point toward policy de-rigidification/normalization.