The choice of former Bank of Japan board member Kazuo Ueda for the next central bank governor is a well-calibrated decision by Prime Minister Fumio Kishida at one of the biggest make-or-break moments of his time in office.
Kishida has been caught in a bind between financial markets anticipating a pivot by the BOJ to a tighter monetary policy and some quarters of ruling party lawmakers who are urging him -- directly or indirectly -- to stick with the "Abenomics" economy-boosting program that has become synonymous with monetary easing.
The news on Friday that Ueda, 71, will likely be nominated as the next BOJ governor stunned financial markets, sending the yen sharply higher against the U.S. dollar and Japanese government bond yields surging in a knee-jerk reaction. A sense of calm later returned after Ueda said the current monetary easing should continue for now.
"It came out of consideration for his party lawmakers so he won't get criticism," a senior member of Kishida's Liberal Democratic Party said.
Kishida has spent weeks pondering who would be best suited to take the helm of a central bank that has come under the spotlight for its persistently dovish stance despite the nation's headline inflation topping its 2 percent target in recent months.
For Kishida, who has called for wealth redistribution to create a "new form of capitalism," maintaining the right balance with former Prime Minister Shinzo Abe's signature policies has become a crucial test.
"If we move too suddenly from Kuroda's path, it will throw financial markets into chaos. No change will also disappoint them," Kishida reportedly told people around him at the beginning of this year.
Around the same time, Kishida made an assessment in public that Japan has not seen "the desired trickle-down effects" over the past three decades, prompting a backlash from conservative lawmakers who took it as a criticism of Abenomics and threatened to rebel should the prime minister change course.
Opposition party lawmakers, too, have been calling for a review of the past 10 years of "unparalleled" monetary easing under Governor Haruhiko Kuroda.
Jun Azumi, the Diet affairs chief of the main opposition Constitutional Democratic Party of Japan, fired a warning shot hours before Ueda's name was reported Friday, saying, "If (the nominee) continues with monetary easing, then it will be difficult for us (to approve him) because its side-effects have begun emerging."
Ueda was a BOJ Policy Board member between 1998 and 2005, just when Japan was battling deflation. During that time, the BOJ entered uncharted territory with a zero interest rate policy in 1999 and quantitative easing in 2001.
Back then, the central bank adopted what is widely known as forward guidance, communicating to financial markets that it would keep its policy rate low into the future, helping to bring down longer-term rates. The idea is believed to have come from Ueda, who also voted against ending the BOJ's zero-rate policy in 2000.
Kishida has clarified his stance of "building on" the results of Abenomics, while leaving financial markets guessing who he will pick for the top job at the BOJ. Strong communication and coordination skills are among the qualities he said would be required of whoever succeeds Kuroda.
"I don't know (Ueda) but kudos to the prime minister who found him (as a candidate)," said a former Cabinet minister close to Kishida.
The choice of monetary policy expert Ueda was a surprise to financial markets but the BOJ will likely have a balanced leadership under him, with former Financial Services Agency chief Ryozo Himino and BOJ Executive Director Shinichi Uchida expected to be tapped as new deputy governors.
The lineup countered market expectations that Kuroda would be replaced by Deputy Governor Masayoshi Amamiya, a key figure in the planning and designing of the policy framework under Kuroda, or Hiroshi Nakaso, a former deputy chief.
Speaking to reporters after the reports about him regarding the BOJ governorship, Ueda said the BOJ's current monetary policy is "appropriate." "It goes without saying that monetary policy should be guided based on the current state of the economy and prices, and their forecasts."
Japan's core consumer prices excluding volatile fresh food items jumped 4.0 percent in December from a year earlier, double the BOJ's target. Kuroda has repeatedly said rising import prices, amplified by a weaker yen, are the major factor accelerating inflation and the 2 percent goal has not been reached in a desirable way.
"Kishida wants to distance himself from Abenomics so he likely picked Mr. Ueda to be entrusted with policy normalization under his new leadership," said Tsuyoshi Ueno, senior economist at NLI Research Institute.
Ayako Fujita, chief economist at JPMorgan Securities Japan, took a similar view, saying, "It's a matter of when, not under who," policy normalization will take place.
The government is scheduled to submit its nominees for the next governor and two deputy governors on Tuesday for approval by both houses of parliament. The candidates will face questions from lawmakers before they can be endorsed and formally appointed.
A native of Shizuoka Prefecture, Ueda taught in the Faculty of Economics as a professor at the University of Tokyo. He would be the first governor hailing from academia in postwar Japan.
Following the news, the key 10-year Japanese government bond yield reached the upper 0.5 percent ceiling on Friday that the BOJ has been desperately trying to defend.
The BOJ decided to widen its target band for 10-year government bond yield movements to between minus 0.5 percent and 0.5 percent in December, feeding expectations of monetary tightening.
Amamiya, one of the BOJ's two deputy governors, who had been among the market favorites, dismissed the idea of making the so-called yield curve control program more flexible "for now."
His term is set to end on March 19, while his boss Governor Kuroda will leave his post on April 8, a decade after assuming it.
"It's true that distortions (in the bond market) remain. But they are improving," Amamiya told a parliamentary session.