Uncertainty over Bank of Japan casts a shadow over markets

With three months left before he is due to step down, Haruhiko Kuroda already holds the record as the longest-serving governor of the Bank of Japan: a mighty tenure of more than 3,500 days. Or, put another way, a long window for the government not to have found a successor.

The yawning, intrigue-scented absence of such an anointment so close to the point of handover (there are still thought to be four credible candidates in the running) seems to guarantee Japanese markets, at a minimum, a skittish start to 2023. It is in the nature of markets to test susceptibility and contradiction, and both Japanese government yields and the yen look increasingly like prime gauges of both.

The scale of Japan’s impact on global markets, note traders, is often remembered late in any cycle. If, as now seems increasingly likely, a new governor begins to steer the BoJ towards a slow normalisation of monetary policy from an epoch of abnormal ultra-looseness, the market tremors could be big and global. Investors, without the dependability of Kuroda’s stubbornness or of a largely range-bound yen, will need to pay much closer attention to BoJ semiotics than they have needed to in recent years.

The signals, though, are already hard to read. Over the past couple of weeks, markets have seen enough to convince them that something odd is happening in and around the BoJ. On December 20, when the central bank announced that it was widening the band that it would allow interest rates on 10-year JGBs to trade under its yield curve control policy, the reaction was profound surprise. Subsequent information has only deepened that.

However strenuously Kuroda insisted that this move did not represent any bias towards monetary tightening, it was widely interpreted as a turning point.

Some concluded that the pivot was deliberate, others that it had been an accidental effect of the BoJ trying to calm volatility and cede some much-needed liquidity to a JGB market of which it owns roughly half. But Naka Matsuzawa, senior strategist at Nomura, suggested that Kuroda had “unintentionally opened a Pandora’s box” that would ultimately lead to the abandonment of the YCC policy.

Two releases since December 20 have been highly revealing. On December 23, the BoJ published the minutes of its October monetary policy meeting, which was naturally scoured for any hint that the YCC policy adjustment was in prospect. There was none. Where there was discussion about the negative side effects of the YCC, noted Kiichi Murashima, economist at Citibank, the tone was “languid”. Based on those minutes, he added, a reasonable conclusion was that at some point between the October and December meetings, Kuroda came under pressure from the administration of Prime Minister Fumio Kishida.

If accurate, the inference that the BoJ is susceptible to outside pressure would muddy the monetary policy outlook: the market must now factor in the agenda of an administration and a leader that have, to date, been unclear on how it will achieve its core policy of delivering a “new capitalism” to Japan. A BoJ susceptibility to market pressure would be pivotal after a decade of Kuroda’s resistance to that. As Nomura’s Matsuzawa points out, if it is known that the BoJ can suddenly, and without communication, change policy when certain market conditions (yen weakness, faster Japanese inflation, rising global bond yields) are in place that invites ever fiercer challenges to the YCC policy from speculators.

On December 28, the BoJ released its summary of opinions from the policy meeting earlier in the month — a meeting carried out amid signs of incipient pressure from the Kishida administration for a revision to the decade-old joint accord between the government and BoJ which focuses on achieving a 2 per cent inflation rate. Analysts looking for greater clarity on the debate that preceded the YCC tweak again found little — a signal that could potentially invite speculators to bet that the loosening policy remains unchanged and start pushing the yen lower again.

To some extent, the market knew something like this was coming: given how far the BoJ has pushed its experiment with quantitative and qualitative easing, there was never going to be anything remotely “normal” about its eventual normalisation.

The central challenge for markets heading into 2023, though, will be reading the government’s selection of Kuroda’s successor — a new governor who must somehow make this process as smooth as possible at a time of a potential global recession, pivotal domestic wage negotiations and the possibility of a China-led inflation rise.

The most plausible way for this to happen is for the new governor’s anointment to be presented as an act of unswerving decisiveness by a government that knows what it wants but has the confidence to let the central bank act without any appearance of influence. The fact that several potential names are still floating around provides markets with an unwelcome source of uncertainty at an already fraught time.

leo.lewis@ft.com