New BOJ Appointments will Strengthen Kuroda’s Hand

new japan

The former BOJ Governor Shirakawa was not sufficiently activist for Prime Minister Abe who pledged to end Japanese deflation.  Many bureaucrats in the BOJ were influenced by Shirakawa’s approach.    Abe went to the opposite side of the ideological spectrum with the appointment of the activist Kuroda (note that Shirakawa refers to white in Japanese and Kuroda refers to black).    

Several key votes, including the asset purchase program and the next interest rates, were decided by a 5-4 vote, where ostensibly Kuroda cast the deciding vote.  Gradually, Abe has made appointments to the board to give Kuroda greater support. A new step was taken earlier today.

The terms of the two remaining Shirakawa-era board members end on July 23.  The Diet nominated their replacements today.  Hitoshi Suzuki and Goshi Kataoka will replace Takahide Kiuchi and Takehiro Sato.  Kataoka is seen as ideologically close to Kuroda.  In addition to reflationist policies, he advocates a more supportive fiscal policy is favors delaying the 2019 planned sales tax hike.  Suzuki comes from the audit board of Bank Tokyo-Mitsubishi.

Although banks’ profits have been squeezed by the low interest rate (and the minus 10 bp deposit rate that applies to a fraction of deposits at the BOJ) policy, Suzuki is understood to be more dovish than either of Kiuchi and Sato.  It is important too that since Ishida’s term ended in June 2016, there has not been a “representative” of the banking industry on the board.

This was former Minneapolis Fed President Kocherlakota’s point about the possible Trump appointment to the Federal Reserve.  Kocherlakota argued the Board of Governors should be a diverse group.  His focus was not on race, gender, religion or sexual preference, but in background, skills, and ideas.   Kocherlakota warned that Quarles background was too similar to Governor Powell in terms of experience (both are lawyers, served in the George H.W. Bush’s Treasury Department, and worked in at the Carlyle Group, an investment firm).

We have pointed out that by the middle of next year, Trump will have the ability to appoint at least five of the seven-member Board of Governors (of the Federal Reserve).  It is clumsy and needlessly antagonistic to take to the airwaves (and social media) to criticize Yellen and the Federal Reserve as Trump did as a candidate.  We have argued that Trump will influence the Fed the old-fashioned way, through the power of appointment.

Japan’s Prime Minister Abe is doing the same thing.  More changes are afoot.  Next March the BOJ’s two deputy governors’ terms expire, and Kuroda’s five-year term ends in April.   Typically (for more than 50 years), BOJ Governors serve a single term.  Many expected Kuroda to retire, but our contacts suggest that this may not be the case.  Kuroda reportedly recognizes his mission is not complete and may be interested in a second term.   Prime Minister Abe has great respect for Kuroda, even if the 2% inflation target has not even been approached.

If Kuroda is not reappointed, the clear indication is that someone from his camp, as opposed to a return to the Shirakawa camp, will be picked.  Deputy Governor Nakaso has been cited as a possible replacement.  Abe-adviser Honda has been suggested, as has Columbia University’s Ito.  Still, given the complexities of Japanese monetary policy, Abe’s trust, and Kuroda’s international standing, we suspect he will be reappointed.