Decisions about next BOJ governor and deputy governors - nomura

The market is currently monitoring very closely as to who the next BOJ governor and deputy governors will be and analysts at Nomura offered a paper on various candidates and implications.

Key Quotes:

"When the ordinary session of the Diet begins in January, the focus of attention will be on the process of approving the appointment of the next BOJ governor and his deputies. 

As the ruling coalition has a large majority in both the Upper and Lower Houses, there is almost no possibility that the cabinet's appointment proposals could be defeated. Therefore the main question is what sort of people the cabinet is going to propose. At a press conference on 1 November Prime Minister Shinzo Abe said that he trusted (Governor Kuroda's) ability and was happy to leave monetary policy to him, an indication of his confidence in both Mr Kuroda and his handling of monetary policy. 

However, on 28 November, in an interview with TV Asahi, another possible candidate for the post of governor, Etsuro Honda, currently Japan's ambassador to Switzerland, said that, if asked by Mr Abe, he would be happy to do his best and that, although he admired Mr Kuroda, he felt that, as things were not going quite as smoothly as they might be, there was a need to adopt a more aggressive policy if the opportunity arose, showing how keen he was to be appointed and how strongly he felt the need for a change of policy. A key point when considering the appointment of the new governor and his deputies is likely to be how to weigh Mr Abe's confidence in Mr Kuroda against Mr Honda's eagerness to be appointed (the latter of which might appear slightly presumptuous). Moreover, whereas Mr Kuroda considers the BOJ's current monetary policy to be appropriate, Mr Honda has advocated a return to quantitative easing in combination with fiscal expansion. Much is also likely to depend on what Mr Abe and his cabinet colleagues think of these differences of opinion about policy. 

In our main scenario Mr Kuroda is reappointed. This would seem to us a natural choice given not only Mr Abe's aforementioned confidence in Mr Kuroda but also the possibility that Mr Abe and his cabinet colleagues may want to avert the political repercussions of the market volatility that could result from a major change of monetary policy. Similarly, given this strong desire to ensure continuity of monetary policy and the traditional practice of appointing one deputy from academia and the other from within the BOJ, Mr Masayoshi Amamiya (currently a BOJ executive director) and Professor Takatoshi Ito (currently a professor at the School of International and Public Affairs, Columbia University), who are both also seen as possible candidates for the governorship, would seem to us to be natural choices as deputies. The corresponding risk scenario would probably be the appointment of Mr Honda in response to his eagerness to be appointed. 

However, we have to admit that we do not detect any desire among Mr Abe and his cabinet colleagues to achieve a 2% inflation rate as soon as possible and at all costs, even if it means adopting the more expansionary fiscal and more accommodative monetary policies that Mr Honda has been advocating. Barring major market turmoil before the appointments were actually made (as a result, for example, of a sharp appreciation of the yen), we think this scenario is highly unlikely. However, we cannot rule out the possibility that Mr Abe and his cabinet colleagues could play the "Honda card" as a way of retaining some degree of influence over monetary policy. The appointment in July of this year of Mr Goushi Kataoka, a well-known advocate of monetary accommodation, as a member of the BOJ's Policy Board could also be seen in this light. In that case, one possibility might be to appoint either Mr Honda or Professor Masazumi Wakatabe of Waseda University, who has similar views on monetary policy, to one of the posts as deputy governor. 

A key strategic consideration would likely be the balance between that appointee and (a) Mr Kuroda and (b) the other deputy governor, who is likely to be someone from within the BOJ. 

However, even if the appointment of either Mr Honda or Professor Wakatabe as deputy governor were to swell the ranks of the reflationists within the Policy Board, we think the BOJ has very few tools left that might enable it to further ease monetary policy. 

We therefore think that such a move would be unlikely to have much impact on actual monetary policy."