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The yen dropped sharply against the US dollar on Wednesday after Japan’s Prime Minister Sanae Takaichi picked two dovish academics for roles at the country’s central bank.
The nominations to the Bank of Japan’s nine-member policy board follow Takaichi’s landslide election victory this month, when her Liberal Democratic Party won a huge majority in the lower house of parliament.
Ayano Sato, of Aoyama Gakuin University, and Toichiro Asada, of Chuo University, both favoured economic stimulus and lower interest rates and they could try to challenge BoJ governor Kazuo Ueda’s efforts to “normalise” policy and keep raising rates, analysts said.
After initially rising in the wake of the election, the yen has weakened steadily for two weeks on concerns about the newly empowered prime minister’s spending plans.
Following news of the nominations the yen slumped from ¥155.5 versus the dollar to about ¥156. The yen had fallen the previous day following a Japanese media report that Takaichi had held a brief meeting with Ueda in which she had expressed reservations about the need to continue raising interest rates.
Overnight swap markets suggest a probability of about 60 per cent that the BoJ will raise rates from 0.75 per cent to 1 per cent at its meeting in April.
Since the February 8 election, analysts had flagged the upcoming vacancies of two BoJ board seats as an early test of Takaichi’s stance on monetary policy and her determination to shape the central bank’s decision-making. The nominations are expected to be confirmed in parliament.
Last Friday, Takaichi used her first major policy speech to parliament to set out what she has branded “responsible and proactive fiscal policy”. But markets remain concerned that she will push for higher government spending, even if that pushes inflation above the BoJ’s target level of about 2 per cent.
In her 2021 book, Towards a beautiful, strong and prosperous country, Takaichi wrote: “To achieve a truly robust economy, an inflation rate of 3 per cent or higher would be ideal.”
Masamichi Adachi, Japan economist at UBS, said the nomination of the two academics suggested that Takaichi was not bothered by how markets might react to the choice or to the raised prospects that interest rate normalisation might stall.
“Its scary that she doesn’t seem to care that much. I thought she was going to be pragmatic, but it seems she really does believe that higher inflation solves many things. I don’t think she has changed [from when she wrote the book] five years ago,” said Adachi.
However other commentators said the nominations would probably have only a limited effect on BoJ policy, given the high level of control that Ueda was judged to exercise over the board.
Jesper Koll, global ambassador at Monex noted that Sato, a lifelong academic, would be replacing Junko Nakagawa, the former chair of Nomura Asset Management.
“Replacing a markets practitioner with an academic strengthens the grip that Ueda has over the BoJ. Ueda has decades of hands-on, policy-making experience in both the domestic and global arena. Normalisation continues,” said Koll.
