With stimulus exit looming, communication challenges await new BOJ trio

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© Reuters. Waseda University professor Masazumi Wakatabe speaks during an interview in Tokyo© Reuters. Waseda University professor Masazumi Wakatabe speaks during an interview in Tokyo

By Leika Kihara

TOKYO (Reuters) – The incoming Bank of Japan leadership looks similar to the one going out but its mission ahead will likely be much different – winding down extraordinary stimulus measures of the past five years and communicating how that will be done to the markets.

The government reappointed BOJ Governor Haruhiko Kuroda for another five-year term when his current one ends in April, signaling no big changes will be made to the bank’s policy framework.

The background of the two deputy governors, who will assume their posts in March, also won’t change much. One of the openings will be filled by a career central banker, Masayoshi Amamiya, and the other by an academic, Masazumi Wakatabe.

The 52-year-old Wakatabe is known as a strong advocate of reflationary policies, centred on BOJ purchases of stocks and government bonds.

But given the rising costs and the practical limits of ramping up those purchases, he likely won’t push for more stimulus once he joins the BOJ, sources familiar with his thinking said.

Wakatabe could, however, oppose attempts to dial back stimulus even if the economy keeps strengthening, complicating the BOJ’s efforts to prepare markets for an eventual exit from its ultra-loose monetary policy, they say.

“Wakatabe could act as a deterrent if governor Kuroda were to shift policy toward an exit in the future,” said Ryutaro Kono, chief economist at BNP Paribas (PA:BNPP) and a veteran BOJ watcher.

“There’s a risk the messages coming out from the BOJ could confuse markets and create volatility,” he said.

Wakatabe replaces another reflationist, Kikuo Iwata, who is stepping down, and thus represents continuity. But Wakatabe’s views are considered even more innovative than Iwata’s, who was an architect of quantitative easing, the sources say.

STEMMING THE DOLDRUMS

While Japan has some way to go in meeting its 2 percent inflation target, Kuroda can at least lay claim to stemming the deflationary doldrums the economy fell into the previous two decades before he took over in 2013.

In his second term, Kuroda’s biggest challenge will be to lay the grounds for an eventual exit from his radical monetary experiment.

For now, the BOJ may need to continue its ultra-easy policy partly to prevent the recent market rout and a strengthening yen from hurting an export-reliant recovery.

BOJ officials say they have internal calculations for an exit strategy. Unlike its U.S. and European peers, however, the BOJ has not made public disclosures about an exit plan. Kuroda has said it’s premature to discuss one with inflation distant from his target.

The exit – or even a discussion of it – would require Kuroda and his deputies to send a consistent message on those plans to the markets.

“Unlike easing, you can’t do shock and awe when telegraphing an exit path. It’s not that simple,” said one of the sources.

RELYING ON AMAMIYA

There is uncertainty on whether Wakatabe is ready to swallow his distaste for an exit and toe the BOJ’s line.

“Deputy governors must assist the governor. It would be problematic for them to send signals to markets that contradict those of their boss,” said Takahide Kiuchi, a former board member who presided at the BOJ until July.

The tricky path toward an exit with the potential for dissension may prompt Kuroda to lean more heavily on the expertise of his other deputy, Amamiya, a career central banker who oversaw its monetary affairs group and markets division.

That could make him a more powerful deputy governor than his predecessors, sources familiar with the matter say.

Having masterminded many of the BOJ’s policies in the past decade, including quantitative easing, Amamiya, 62, has cultivated a reputation as a highly creative and flexible central banker.

Amamiya is now seen as a leading candidate to succeed Kuroda. His chances of taking the helm would rise if he helps steer a smooth exit from the ultra-loose policy, analysts say.

“You can’t have surprises when you’re exiting easy policy. You need markets to factor in the BOJ’s intentions so long-term rates rise smoothly,” said Hideo Kumano, a former BOJ official who is now chief economist at Dai-ichi Life Research Institute.

“That’s where Amamiya’s skills will be put to test.”

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