Haruhiko Kuroda’s nomination as the next Bank of Japan (BOJ) governor has won swift acclaim from financial markets weary of Japan’s post-bubble slump. Japanese stock prices surged on news of the nomination of the Asian Development Bank (ADB) boss, with global investors joining the rally on optimism over more aggressive monetary expansion in the world’s third-biggest economy.
After 15 years of deflation, the BOJ’s cautious approach has failed to deliver and the former finance ministry chief has the backing of Japanese Prime Minister Shinzo Abe to do whatever it takes to change expectations. But amid the market fervor, can Kuroda deliver?
Having run Japan’s currency policy from 1999 to 2003, served as an adviser to reformist former Prime Minister Junichiro Koizumi and led the ADB since 2005, the 68-year-old boasts a strong track record and will also be able to argue his case in English with international bankers.
Along with Kuroda, Gakushuin University professor and well-known BOJ critic Kikuo Iwata was nominated as one of his two deputies, with current executive director Hiroshi Nakaso named as the other.
Current governor Masaaki Shirakawa’s term does not end until April 8th, but under pressure from Abe he earlier announced plans to step down on March 19th, along with his two deputies.
While Abe’s nominees could potentially be blocked in the upper house, where the Liberal Democratic Party-New Komeito ruling coalition lacks a majority, few expect the opposition to muster the necessary votes.
However, the Democratic Party of Japan (DPJ), Your Party and other opposition parties have urged longer than usual confirmation hearings for the three candidates.
“Not only Japan, but also the whole world is watching who will head the BOJ,” DPJ lawmaker Shu Watanabe told local media.
“We can’t make a decision if a hearing lasts only a few minutes,” he said.
Both houses of the Diet are required to endorse the candidates, with the ruling coalition reportedly seeking a lower house vote on March 14th and upper house approval a day later.
Kuroda and Iwata have both publicly supported “Abenomics,” with Kuroda indicating potential moves to buy corporate bonds or stocks to pump more cash into the economy.
In January, Abe forced the BOJ to target an inflation rate of 2 percent, and according to Kuroda the target could be achieved within just two years – despite the central bank’s current forecast of just 0.9 percent inflation in fiscal year 2014.
The Japanese currency has dived 10 percent against the U.S. dollar since Abe was elected in December, but Kuroda is expected to defend yen weakness against claims of a “currency war” by critics overseas.
However, should Kuroda and his deputies gain lawmakers’ approval, they will still have to convince the other members of the nine-member BOJ policy board that further action is necessary.
At least two board members voted against the introduction of the 2 percent inflation target, with one such member, Takahide Kiuchi, saying a deadline should not be set.
High expectations
The new leadership’s first policy meeting is slated for April 3-4, with analysts expecting immediate action.
“Expectations are high, and markets won’t be satisfied with just an extension of current policies,” Masamichi Adachi, senior economist at JPMorgan in Tokyo, told Bloomberg News.
“The new leadership has to show it is different from the previous regime.”
Having advocated an inflation target for more than a decade, Kuroda has indicated that the central bank could take additional easing measures this year above those planned for 2014.
Japan analyst Jeff Kingston of Temple University, Japan said the new central bank chief faced a major challenge in satisfying markets.
“Kuroda brings a lot of experience to the job and will be a far more effective communicator than his predecessor. His challenge is not disappointing markets that have already priced in to yen and stocks expectations of much more aggressive monetary easing,” Kingston told The Diplomat.
“He has to get the board to go along and the big question is whether he can get the BOJ to invest in riskier assets, like exchange traded funds, or will he just rev up more of the typical QE [quantitative easing] measures.
“In many ways, many of the expected outcomes of QE on steroids – unlimited monetary easing – have already been realized, so he will have to really make some wow moves to achieve anything more.”