Japan’s stock market rally, fueled by expectations for aggressive monetary easing, raises the risk of disappointment as Prime Minister Shinzo Abe prepares to unveil his choice of central bank chief.
The Nikkei 225 Stock Average has gained more than 25 percent in the past three months as the yen fell nearly 14 percent against the dollar in the same period. The benchmark index halted its 12-week advance yesterday after Sony Corp. reported a surprise loss, while the yen rose after the nation’s finance minister said the currency’s fall was too quick.
Potential candidates to succeed BOJ governor Masaaki Shirakawa cited by analysts and local media reflect a range of monetary policy outcomes. While Asian Development Bank President Haruhiko Kuroda says the BOJ should ease until it reaches 2 percent inflation and former BOJ Deputy Governor Kazumasa Iwata has urged more expansive easing, Toshiro Muto warned of the dangers of prolonged loose policy when he was deputy governor five years ago.
“Abe just can’t afford to fail on this,” said Yoji Otani, an analyst at Deutsche Bank AG in Tokyo. “If he appoints someone who doesn’t signal aggressive easing, the favorable market trend could be reversed and Abe could lose upper house elections in July.”
Almost seven in 10 voters have positive expectations for Abe’s economic policies, according to a newspaper poll published Feb 4., support that Abe will want to maintain before the election for control of the upper house.
The yen’s weakening has boosted the outlook for exporters from Toyota Motor Corp. to Panasonic Corp. Toyota’s shares have risen more than 50 percent in the past three months, with the automaker this week raising its profit forecast for the year ending in March to a five-year high.
Finance Minister Taro Aso told reporters in Tokyo yesterday that the yen’s drop has been “too rapid,” after earlier telling lawmakers the government hadn’t anticipated the yen’s rapid move to around 90 per dollar. The yen was 1.3 percent higher at 92.42 per dollar at 7:30 p.m. in Tokyo yesterday, after rising as much as 1.6 percent, the most since March 2011.
Shirakawa accelerated the BOJ leadership transition with an announcement on Feb. 5 that he’ll step down with his two deputies on March 19, almost three weeks before his term was due. The Nikkei rose to a more-than-four-year high the next day.
The government should unveil its nominations for the new BOJ leadership team by the end of February, the ruling Liberal Democratic Party said last month. While Abe’s coalition has a majority in the lower house, it will need help from smaller opposition parties in the upper house for its choices to be confirmed.
Japan’s government will name candidates to succeed Shirakawa and the two deputy governors before Abe visits the U.S. later this month, the Sankei newspaper reported today, without saying where it got the information. Abe will meet U.S. President Barack Obama on Feb. 21 or Feb. 22, the paper said.
Muto, chairman of the Daiwa Institute of Research, was the government’s first choice for BOJ governor in 2008, only for his nomination to be rejected by upper house lawmakers who saw his finance ministry background as a threat to the bank’s independence.
He said in an interview last month that he’s changed his view from 2007, when as a deputy he repeatedly said that keeping interest rates too low could be problematic. He now says that ending deflation is the priority.
“If it’s Muto, the market will likely be disappointed, the yen will strengthen and stocks will fall,” said Koichi Haji, executive director at the NLI Research Institute in Tokyo. “He’s stable and reliable, but he doesn’t represent the change that Abe has vowed to make.”
The BOJ last month adopted a 2 percent inflation target without a deadline and said it would wait until 2014 to start open-ended asset purchases. All 20 economists in a Bloomberg News survey that closed yesterday expect the central bank to hold off from more easing at a meeting on Feb. 13-14.
Abe indicated yesterday in parliament that he may seek to change the law governing the BOJ if the central bank’s policies are ineffective.
Kuroda, who once wrote that the BOJ should set a 3 percent inflation target, was a career bureaucrat who rose to be vice finance minister in charge of currency policy. He has led the Manila-based ADB since 2005.
Kuroda is “the No. 1 candidate” to head the central bank, JPMorgan Securities Japan Co. chief economist Masaaki Kanno wrote in a research note last month. He fits the profile stipulated by Finance Minister Taro Aso of having managed a large organization and international experience, Kanno wrote.
Kazumasa Iwata, head of the Japan Center for Economic Research, has championed the idea of the central bank buying foreign-currency bonds to reverse exchange-rate appreciation. The LDP last year said it would consider the proposal.
Deutsche’s Otani said that Kikuo Iwata, an economics professor at Gakushuin University in Tokyo, would be the best choice for continuing the stock market rally given his views on monetary policy. Iwata said in an interview last month that the BOJ should expand the monetary base by doubling the assets in its current account, while he told LDP lawmakers this month that monetary policy alone can end deflation.
Kikuo Iwata is among the contenders to head the BOJ, according to Koichi Hamada, a retired Yale University economics professor who is advising Abe on monetary policy.
Yoshimi Watanabe, the leader of the minority Your Party in parliament, said in an interview last month that his group won’t back a BOJ insider to be the next central bank governor and the government should consider former Economy Minister Heizo Takenaka for the post. He also indicated that Kuroda should complete his five-year term through 2016 as head of the ADB.
Still, with signs of a recovery in global demand --Chinese exports rose 25 percent in January, government data showed yesterday -- Nomura Holdings Inc. says that any market reversal in Japan may be temporary.
“The yen isn’t moving only because of monetary policy expectations,” said Tomo Kinoshita, chief economist at Nomura Holdings in Tokyo. “I see a fair chance the yen will resume its depreciation even if Abe disappoints with his choice of BOJ personnel.”
Shirakawa’s exit is part of a global changing of the guard, with Canada’s Mark Carney to take the helm of the Bank of England in July. In China, Governor Zhou Xiaochuan will step down next month, the China Securities Journal said Feb. 2. In the U.S., Janet Yellen may be a candidate to replace Chairman Ben S. Bernanke at the Federal Reserve a year from now.
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