Japanese Prime Minister Shinzo Abe is likely to nominate an advocate of aggressive monetary policy easing — Asian Development Bank (ADB) president Haruhiko Kuroda — as the next Bank of Japan (BOJ) governor to step up his fight to finally rid the country of deflation.
Abe won a big election victory in December last year promising to revive the fortunes of an economy stuck in the doldrums for most of the past two decades.
He has repeatedly called for a more aggressive central bank willing to take radical steps.
The yen fell on the nomination news to a 33-month low and yields on five-year government bonds hit a record low as markets moved to factor in bolder monetary policy.
“Kuroda is a fan of a weaker yen and of deflation bashing,” said Kit Juckes, a strategist at Societe Generale in London.
Sources said the government is likely to nominate Kuroda and two deputies this week for parliamentary approval.
It is also lining up Kikuo Iwata, an academic who advocates unorthodox monetary easing steps, and BOJ executive director Hiroshi Nakaso, who now oversees the bank’s international operations, as deputy governors, a source familiar with the process said.
Iwata told reporters he had been offered the job and he would accept it.
However, Kuroda has long criticized the BOJ as too slow to expand stimulus, so he is expected to push for more radical efforts to achieve a 2 percent inflation target set last month.
“Kuroda’s nomination won’t change the course that has been dictated by Abe in recent months — that is aggressive monetary policy, but perhaps thanks to the inclusion of Iwata the market will expect more eye-catching bold easing measures,” JPMorgan Securities senior economist Masamichi Adachi said.
The nominations to lead the BOJ must be approved by both houses of parliament, which means Abe will need opposition support because his ruling bloc lacks a majority in the upper house. The incumbents leave March 19.
The main opposition party, the Democratic Party of Japan (DPJ) is likely to support Kuroda, although some in the party may oppose the choice of Iwata on grounds that his reflationary views are too extreme, party officials said.
Among other beliefs, Iwata has argued the bank is mostly to blame for prolonging deflation by not being aggressive enough in easing policy.
If approved, the nominations increase the chances that the BOJ will ease monetary policy on April 3 and April 4, the first rate review under the new leadership, officials with knowledge of the central bank’s thinking said.
“Monetary easing is pretty much a given. The question is what specifically the BOJ will do,” said one official, who spoke on condition of anonymity due to the sensitivity of the matter.
The BOJ has already pledged to pump ￥101 trillion (US$1 trillion) into the economy by the end of this year by buying assets and through a lending program and to shift to open-ended purchases from next year.
To underline a more aggressive policy in April, the most likely options include starting the open-ended buying sooner than planned and increasing the amount of monthly asset purchases, the officials said.
Extending government bond purchases to maturities beyond the current three years or buying more risky assets, such as exchange traded funds, are also options.
A drastic overhaul in the way the BOJ buys assets could take some time to materialize, while foreign bond purchases is also unlikely as Kuroda has ruled it out as an option, they say.