BOJ Nominee Promises Bearish Stance

There will be a changing of the guard at the Bank of Japan later this month when the governor Masaaki Shirakawa steps down on the 19th of March. A central plank of Prime Minister Shinzo Abe’s election campaign was to drive economic demand by whatever means were required. He even suggested that the BOJ should print limitless money if that was what it takes to get things on track. Whilst this was probably pure rhetoric, it is clear that the new government wants the BOJ to take a more aggressive stance than it has under the current governor.

The Prime Minister has nominated Haruhiko Kuroda as the next head of the BOJ although his appointment will need approval from the Japanese parliament. Mr Kuroda is currently serving as president of the Asian Development Bank. At the urging of the new administration, the BOJ has set a target that inflation should rise to 2% as a mechanism to end deflation and stoke domestic demand. Mr Kuroda is clearly in support of this doctrine: "If I am approved as Bank of Japan governor, I believe it will be my most important duty to ensure the price stability is reached as soon as possible," he told the parliamentary confirmation hearing. He also suggested that the BOJ would increase its asset purchasing activities and also invest in longer-term government bonds under his leadership. The purchase of long-term government bonds would generate increased demand for them which should keep borrowing costs down. Japan has the largest debt burden in the world.
Japan’s stock market has reacted favourably on Mr Kuroda’s nomination and has hit a new high for trading this year. It is likely that a looser fiscal policy would further weaken the Yen which would benefit Japan by making its exports more competitive in importing markets. It also has the advantage that foreign currency earnings made overseas are worth more Yen when repatriated, potentially providing more funds for expansion in Japan.