By Noriyuki Suzuki,
An academic, a monetary policy expert, a pragmatist, not an outright hawk, and the list goes on.
A variety of words have been used to describe Kazuo Ueda, the government's nominee for the next Bank of Japan governor after incumbent Haruhiko Kuroda, a surprise choice that rattled financial markets when the news first broke.
Now that the nomination of former BOJ board member Ueda, 71, is official, the question in financial markets appears to be when and how, rather than if, the BOJ will make policy changes if his nomination is approved by parliament.
There are still many unknowns, including how he views the current state of the Japanese economy, especially inflation, and the policy framework that centers on a scheme known as yield curve control (YCC) to keep short- and long-term interest rates extremely low.
Experts and critics of the BOJ's protracted monetary easing say the 2 percent inflation target should be redefined and that the time is ripe to review a 2013 joint statement with the government that includes the central bank's pledge to achieve it as soon as possible and has bound its monetary policy.
"Mr. Ueda is the kind of person who places importance on being logical, and expectations are that the BOJ's messaging will improve under him," said Mari Iwashita, chief market economist at Daiwa Securities.
"That will be a change from the BOJ under Governor Kuroda, who often surprised markets. We have to listen to what Mr. Ueda will have to say in parliament but remember the crux of forward guidance -- that is, to communicate the central bank's intent clearly and make it predictable," Iwashita added.
The BOJ sets short-term interest rates at minus 0.1 percent and guides 10-year Japanese government bond yields to around zero percent under the YCC program.
In December, the bank started allowing the benchmark 10-year yield to rise to 0.5 percent, from 0.25 percent before, in an abrupt decision that has sent yields soaring and prompted more bond buying by the central bank to rein in the surge.
Known as forward guidance, the central bank provides communication about its future policy by pledging to keep its policy rate low for an extended period in the hope of bringing down longer-term interest rates. It was Ueda's idea when the BOJ first used it years ago.
His deep knowledge of monetary policy has helped the BOJ make historic decisions to adopt a zero interest rate policy in 1999 and begin quantitative easing in 2001, when Japan was battling deflation. He was a Policy Board member between 1998 and 2005.
Last week, Ueda said that the current monetary easing should continue for a while, helping the yen ease against the U.S. dollar after surging on media reports of his impending nomination.
BOJ watchers cite his article contributed to the Nikkei business daily in July last year, in which he cautioned against hasty rate hikes that would have a negative impact on the economy and the inflation rate, and limit the range of rate increases over the medium- to longer-term.
In the same article, Ueda also said the long-term yield control program is not "suitable" for minor tweaks, calling for a thorough review in the future of the monetary easing framework that has been in place longer than many expected.
"The current struggle for the BOJ is how to control long-term interest rates. If YCC is scrapped altogether, long-term yields will surge. So it will expand the ceiling (on the 10-year government bond yield) to 0.75 percent and then 1.0 percent before YCC is abolished," said Hideo Kumano, executive chief economist at Dai-ichi Life Research Institute.
Kumano expects the BOJ will examine the effects of the current policy framework shortly after April when Ueda's term will begin if his nomination is approved, and review the YCC program this year.
Even after the December decision to raise the 10-year yield ceiling, Kuroda has repeatedly said monetary easing should remain because the 2 percent inflation target has yet to be achieved in a "stable and sustainable fashion," accompanied by wage growth, a requisite to support domestic demand and price hikes.
The International Monetary Fund has called for more flexibility in long-term Japanese government bond yields, while a key panel of academics and corporate executives has proposed that 2 percent inflation should be redefined as a "long-term" goal.
With parliament expected to hold hearings later this month for Ueda, financial markets are keeping close tabs on how he views the inflation target and the decade-old document. Government sources said earlier that the administration is considering revising the key document with the next governor.
"It will be impossible (for Ueda) to take over what Kuroda has built over the past 10 years and carry on for the next five years," said Norihiro Fujito, chief investment strategist at Mitsubishi UFJ Morgan Stanley Securities.
But Fujito said the outlook is "utterly uncertain" at this point before Ueda clarifies his current stance, adding that what he said in the past carries little importance. "It's wise not to judge him based on how he has been labeled. Everything starts from here."
In parliament, Kuroda has said Japan is "not in a state of deflation" owing to powerful monetary easing. The nation's headline inflation has stayed above 2 percent for months, accelerated by higher import costs that came as a result of the yen's rapid depreciation, a byproduct of monetary easing.
Ueda voted against ending the zero interest rate policy in 2000, one reason why some market participants see him as dovish. Still, the situation now is different from some 20 years ago, Daiwa Securities' Iwashita said.
"There were heightened concerns about deflation at the time, but the phase has shifted to coping with rising prices," she said. "Ueda is well-versed in monetary policy and has a network of experts both at home and abroad, so markets are hoping that he will come up with a novel idea (to address the side-effects of easing)."
(Reito Kaneko contributed to this story)
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