Japan's next prime minister will have to appoint a replacement for BOJ Gov. Haruhiko Kuroda, who since the spring of 2013 has been running an aggressive yen-printing operation as he seeks to raise the country's stubbornly flat inflation rate to 2%.
His term is coming to an end in April 2023, and who will be Kuroda's replacement is a question that had vexed Yoshihide Suga ever since he became prime minister one year ago.
Almost immediately after replacing Shinzo Abe as prime minister, Suga asked Deputy Prime Minister Taro Aso, who doubles as finance minister, "What do you think about the BOJ governorship?" Suga entertained names for the job up until the beginning of this year.
More recently he announced he would effectively step down as president of the ruling Liberal Democratic Party and thus as Japan's prime minister. This means he is also stepping away from the task of determining who will guide the BOJ through the post-Kuroda era. That burden will fall to Suga's replacement, who will be identified on Sept. 29, when the LDP holds its presidential election.
Suga had promised to continue his predecessor's Abenomics policies, which are based on massive monetary easing. With Suga's departure, however, the market will be prognosticating what the next administration's approach to monetary policy might be.
It is unlikely that the next prime minister will insist that the current monetary easing be immediately reversed, but different thinking about the current situation in the medium to long term will inevitably emerge.
Administrative reform minister Taro Kono, the leading contender in the LDP race, appears to harbor some skepticism that BOJ easing alone is enough. "[Inflation] will result from economic growth," he said. "It's quite difficult to see how it can happen in the current conditions. ... It is important for the BOJ to communicate well with the market."
Another contender, Fumio Kishida, seems to wonder if it is time to start thinking about an exit strategy. "It is important to look at the situation in other countries when considering the future," he said. In his 2020 run for the position, he mentioned the side effects of the current monetary policy, such as financial institutions' deteriorating profits.
Sanae Takaichi, a third candidate, has said that the government's fiscal consolidation target would be put on the back burner until Japan achieves 2% inflation.
Market participants believe that the debate in the LDP election could provide a chance to reexamine monetary policy, as well as "offer a clearer picture of who a new prime minister would envision as BOJ governor," said Yuji Saito of Credit Agricole Bank.
The new prime minister will also be left to finish the current administration's homework -- namely how to handle the policy accord released by the government and the Bank of Japan in January 2013. The joint statement was released shortly after Abe took office in December 2012, and it has been left unchanged for the past eight years.
The document states that the government and the BOJ will improve their policy coordination to achieve 2% inflation "at the earliest possible time." In contrast with central banks in the U.S. and Europe, which have begun to reduce their quantitative easing out of inflationary concerns, the BOJ's 2% target remains out of sight.
In fact, the Finance Ministry and BOJ discussed revisions to the document, which remained official policy in name only, when the premiership changed in 2020.
Officials involved said they needed to be ready to act if the prime minister gave the word, and that the change in leadership offered a chance to alter the statement. Ultimately, however, Suga decided to leave the document unchanged.
The Nikkei Stock Average had dropped to about 16,000 yen in March 2020 because of the coronavirus pandemic, but by September it had recovered to about 23,000 yen, near its pre-pandemic level. "We didn't want to create chaos by issuing a new statement," a senior government official said.
Markets will be watching closely to see if the next administration will issue a new joint statement that clarifies its stance on monetary policy.
A number of variables will also affect who becomes the next BOJ governor. First, the dynamics within the LDP will play a role. Abe, who wields strong influence in the Hosoda faction, the largest of the LDP's intraparty groupings, supports continued easing. The results of the LDP leadership election and the lower house election due this fall will determine whether the new prime minister will have a free hand in choosing personnel.
The upper house election next summer is another factor. Regardless of the outcome of the lower house election, a "twisted parliament," in which the two houses of the Diet have different majorities, will return. In 2008, the government's plan to appoint a new BOJ governor was twice rejected by the upper house, and for the first time since the end of World War II, the post remained vacant for three weeks.
Monetary easing halted the appreciation of the yen, leading to a recovery in corporate earnings and a rise in stock prices, but its limitations have become clear. The upcoming lower house election will give the ruling coalition and the opposition parties a chance for productive policy debates for post-pandemic Japan.