Could the new BoJ governor reverse the fall in the yen?

Japan's government named Kazuo Ueda as its pick to become the next central bank governor.

>> All eyes on BoJ’s actions

Bank of Japan Governor Kuroda has presided over a near 25% fall in the value of the yen during his near-decade in office. That’s a big fall, but it was an inevitable consequence of trying to rid the country of deflation. If his replacement Ueda is tasked with reversing much of what Kuroda did, will it reverse the fall in the yen as well?

Mr. Steve Barrow, Head of Standard Bank G10 Strategy thinks that there will be a modest reversal in the performance of the yen but it is unlikely to be a case of reversing all that Kuroda did. For one thing, we have to bear in mind the context of Kuroda’s appointment in March 2013. It came just over three months after former PM Abe won the December 2012 election. Abe’s so-called three arrows for improving Japan’s economic performance comprised easy monetary policy, fiscal consolidation and structural reform. Kuroda was tasked with the first of these, and he responded immediately with aggressive monetary action.

Hence there was a real sense of a change in direction, borne of the persistent deflation that had hounded the economy for much of the previous 20-years or so. Fast-forward to today, and Ueda clearly comes in at a time when there’s been no such political earthquake and arguably no need for a big change in the BoJ’s mandate.

Moreover, the fact that Kuroda’s initial aim to lift inflation to 2% in two years has never really been met on a sustainable basis only serves to highlight that the deflationary mentality has still not fully left the country. Of course, there are claims that this is happening now, particularly as wage inflation rises, but the jury is still out on this one, and current BoJ members, including Kuroda, still believe that inflation will fall back to 2%, or lower, in coming years.

In other words, the case for bringing in a new brush in the shape of Ueda to reverse the course followed by Kuroda seems to be lacking. It is possible that Ueda and his new deputies could take a different view from the current BoJ board and declare that deflation is – or will soon be – defeated.

>> What is the outlook for the yen in 2023?

In doing so, the new BoJ board could argue from April on that the 10-year JGB target range of plus or minus 0.5% needs to be increased, and not just widened, as we’ve seen again recently. At a later stage, it could be decided that the target for short-term rates should be increased from its current sub-zero level of -0.1%. But while these things are possible, Mr. Steve Barrow thinks they are unlikely, at least at this early stage. How might this impact the yen? Again, the experience of the Kuroda-led BoJ may be of use here. For Kuroda, he took over the BoJ at a time when the dollar and yen had already risen on speculation that new Prime Minister Abe would appoint a dovish BoJ leader to carry out the first arrow of his three-arrow plan.When Abe was elected dollar/yen was around 82 and had soared to 95 by the time Kuroda became BoJ governor three months later.

In short, the bulk of the rise in the dollar/yen had really happened before Kuroda got into office, as the market preempted the imminent loosening of monetary policy. If we come back to today, we’ve seen the dollar/yen fall significantly from the high point of 150 last October. Some of this appears to be due to speculation that current PM Kishida would appoint a new BoJ governor who would seek to slowly reverse much, or all, of Kuroda’s easing. But this creates a risk that if Ueda proves to be "more of the same" the surge in the yen that we’ve seen in recent months could reverse. Indeed, price movement over the past few weeks seems to support the idea that the market might have already decided to take some of this post-Kuroda premium out of the yen.

"We could see more of this premium come out in the short-term with the dollar/yen returning to the 140 region, for instance. However, when we look over the long haul, we feel that we can’t ignore the general outlook for the dollar. During Kuroda’s time in office, the dollar has risen by around 30% in trade-weighted terms. If Ueda stays in the post for a decade, we’d not be surprised to see the dollar move 30%, but in the opposite direction, and that should help ensure that Ueda will leave office with a stronger yen than he inherited, unlike Kuroda", said Mr. Steve Barrow.