USD/JPY: focus turning to BoJ leadership change, a more dovish outcome? - Nomura

Analysts at Nomura explained that investor interest in the BOJ leadership change has been increasing Media interviews (Bloomberg and Reuters) with Etsuro Honda, one of the possible candidates for the next governor, attracted market interest last week. 

Key Quotes:

"Mr Honda argues that the BOJ needs a new leader to achieve its inflation goal of 2%, as the regime needs to be rebuilt. He said “if I was appointed, I will do the utmost and stake my life to defeat deflation,” openly showing his willingness to be the next BOJ governor. Mr Honda said the BOJ should commit itself to achieving the government’s aim of expanding nominal GDP to JPY600trn by reviewing a joint statement. He also called for further fiscal spending backed by BOJ purchases of JGBs, according to Reuters. The details of any new policies Mr Honda might propose were he to become the next governor are unclear, but his comments suggest there would be less differentiation between fiscal and monetary policies, which would likely increase market expectations for a helicopter-money-type policy mix.

FX investors see Governor Kuroda’s reappointment as increasingly the most likely scenario. The November FX investor survey released by Nikkei QUICK shows that 79% of respondents see Governor Kuroda’s reappointment as the most likely outcome, up from 55% and 60% in the previous two surveys. Deputy Governor Nakaso is still viewed as the second most likely next governor, but expectations have declined. The same is true for Masayoshi Amamiya, an executive director of the BOJ. The total share of these three candidates, or status-quo-type options, is still high at 93%. Only 5% of FX investors expect Mr Honda to be the next BOJ governor, while the share has risen marginally.

Governor Kuroda repeated yesterday that there is still a long way to go to reach the 2% inflation goal and the BOJ will persist with aggressive easing. To determine the optimal shape of the yield curve, he touched on the “natural yield curve” and the “reversal rate”, two concepts that will be important to judge the timing of the exit policy in the future, but his current assessment does not suggest the exit is imminent. If Governor Kuroda is reappointed, the current policy framework is likely to be maintained. Reappointment of Governor Kuroda is the clear consensus scenario, and it would be a status quo option. Thus, it would probably not be JPY positive. In contrast, Mr Honda’s appointment would be viewed as a more dovish outcome, and so the appointment of the BOJ governor is an asymmetric risk event, in our view."