By Leika Kihara
TOKYO, Feb 26 (Reuters) – Japanese Prime Minister Sanae Takaichi’s choice of two like-minded monetary doves to the central bank’s board sends a not-so-subtle message about her distaste for higher interest rates, casting doubt on how much further policy can be tightened.
The Ministry of Finance, which in the past had been involved in forming a list of candidates for the post, was kept out of the loop with the premier holding her choice close to her chest, two sources familiar with the matter said.
The nominations of academics Toichiro Asada and Ayano Sato to the Bank of Japan board, made public on Wednesday, surprised some in the market who believed Takaichi’s government would have opted for more moderate candidates, sending the yen lower.
While the BOJ could still raise interest rates in coming months, the appointments may have long-term implications on the kind of battles awaiting a policy normalisation process that could take years, if not decades.
Takaichi’s hands-on approach to monetary policy heightens the chance her administration will add more reflationists to the BOJ’s nine-member board when two more hawks see their term end next year, analysts say.
If the dovish premier stays in power long enough, she would also have authority to pick the BOJ’s new leadership when Governor Kazuo Ueda and his two deputies see their terms end in 2028 – potentially piling pressure on an institution that has seen political interference before.
“If the government tries to politicise the Bank of Japan then the same thing we’ve seen in the U.S. could happen in Japan, which is bond selling as well as currency selling,” said Yusuke Miyairi, FX strategist at Nomura Securities in London.
“I wouldn’t say BOJ independence is threatened at the moment, but the government is trying to have more power in the BOJ’s policy decisions,” he said, adding the appointments shed more light on Takaichi’s attitude to monetary policy.
The nominations need approval of both houses of parliament to take effect. Takaichi’s ruling coalition has a majority in the lower house, but needs votes from opposition lawmakers in the upper house, where it is a minority.
MESSAGE CLEAR
An academic known for advocating massive stimulus, Asada joins at the end of March to succeed dovish board member Asahi Noguchi.
The other nominee, Sato, is also an academic who has preached the benefits of expansionary fiscal and monetary policy. She will join when Junko Nakagawa, who has been seen as neutral to slightly hawkish on monetary policy, departs in June.
Both nominees belong to a group of reflationists who have advocated expansionary fiscal and monetary proposals now flagged by Takaichi, and have ties with dovish former BOJ executives like ex-deputy governor Masazumi Wakatabe.
STACKING THE BOARD
To be sure, the appointments are unlikely to directly affect the BOJ’s near-term policy decisions. The nominees won’t join its meeting in March.
Asada, as a newcomer, is unlikely to rock the boat at his debut meeting on April 27-28, while Sato’s first chance to participate will be the rate review in July.
The views of the newcomers may also change as they face the realities of deciding policy in the face of volatile markets, economic uncertainties and unexpected shocks, said former BOJ official Nobuyasu Atago.
“Once they join, the board members shed their ideologies and become more practical,” said Atago, who served as staff of a BOJ board member during his stint at the central bank.
“BOJ staff would barrage them with briefings, which could be overwhelming for newcomer academics,” he said. “I think yen moves matter far more than the Takaichi nominations.”
The most recent example is board member Noguchi, who joined the board as a strong proponent of aggressive monetary easing, but shifted course and voted for the BOJ’s past two rate hikes.
Still, the newcomers will likely affect the policy debate by changing the composition of the board, which has increasingly shifted in favour of a near-term rate hike as the yen’s downtrend keeps food inflation stubbornly high.
Noguchi is seen as the last of the once-dominant reflationists, who gained power by providing the theoretical backbone of former premier Shinzo Abe’s “Abenomics” stimulus policies.
Two hawkish board members, Naoki Tamura and Hajime Takata, have been vocal in their calls for further, near-term rate hikes with Takata unsuccessfully proposing rate hikes in January for a second straight meeting.
While there is uncertainty on how the two newcomers may position themselves on the board, the biggest impact may come from the explicit, dovish message Takaichi delivered with the nominations, analysts say.
The Nikkei newspaper reported, without citing sources, that Takaichi had voiced displeasure over the BOJ’s December rate hike to people around her, fretting over the impact on mortgage rates and capital expenditure.
Given the huge political capital Takaichi gained from her party’s landslide victory in an election earlier this month, it would be hard for the BOJ to push through rate hikes without consent from the administration, analysts say.
“Up till now, the Takaichi administration didn’t send clear communication on its view on monetary policy,” said Takahiro Otsuka, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities in Tokyo.
“This nomination is a message it is pursuing a high-pressure economy,” focusing on reflating growth, he said.
(Reporting by Leika Kihara; additional reporting by Tamiyuki Kihara, Makiko Yamazaki and Kentaro Sugiyama and Alun John in London; Editing by Sam Holmes)
