Kishida's Choice

The prime minister and the central bank

Source: Wikimedia Commons

Nikkei broke some news over the weekend when it reported that the Kishida government was in late-stage consultations with the ruling coalition about the appointment of Bank of Japan (BOJ) Deputy Governor Amamiya Masayoshi to succeed Kuroda Haruhiko when his ten-year tenure as the BOJ’s governor ends in March. The Kishida government, however, quickly denied the report. Isozaki Yoshihiko, deputy chief cabinet secretary, stated that there was no truth to the matter. Kishida neither confirmed nor denied the report and guessed that it was a “trial balloon,” indicating that he is continuing to weigh his decision.

Of course, we will know soon enough – and, notwithstanding the government’s denials, Amamiya is undoubtedly on the short list. A career BOJ official (class of ’79) who as a BOJ executive director from 2012 until 2018 was responsible for the Monetary Affairs and Financial Markets Departments (as well as the bank’s think tank, the Institute for Monetary and Economic Studies) before becoming deputy governor, he was a critical architect of the implementation of Kuroda’s unconventional monetary easing policies. In particular, as a career BOJ staffer – he has been called “Mr. BOJ” and “the BOJ prince” – his support for the program helped legitimate Kuroda’s policies within the bank and enabled him to serve as conduit between ex-MOFer Kuroda and the permanent staff.

Accordingly, it is not at all surprising that he would be on the short list for Kuroda’s replacement. Indeed, before it became apparent in 2018 that Kuroda would be appointed to a second term, Amamiya was floated as a possible successor even before he had served as deputy governor.

It is less clear what his ascension to the governorship would mean. While it might be an overstatement to call it a poisoned chalice, the challenges facing the next BOJ governor are difficult to untangle and – perhaps more importantly – politically sensitive. The inflation has reached 4.0%, the highest level in thirty-two years, putting pressure on real household incomes and raising the stakes for this year’s “spring offensive” wage negotiations. Kuroda’s decision in December to widen the band within which the BOJ’s long-term interest rate target can fluctuate has increased speculative pressure on Japanese government bonds, resulting in an enormous surge in BOJ bond-buying via the yield curve control program to defend the target (and raising the risks to the BOJ’s balance sheet when it does raise interest rates). And while the global economic outlook may look slightly better, as the IMF summarizes, “the balance of risks remains tilted to the downside.”

The question of whether to further widen the band or end YCC is not only bound up with inflation, incomes, and exchange rates, but also the Japanese government’s debt-servicing costs, a not-inconsiderable question at a moment when the Kishida government is ramping up spending on defense, aid to families, and green growth, for the time being all funded by various forms of debt. The Ministry of Finance has estimated that if the interest rate on long-term government bonds rises by 1% by FY2026, the Japanese government will at least an additional ¥4 trillion on debt service in 2026; if all interest rates increase by 1%, debt-servicing costs could swell by more than ¥8 trillion.

In other words, unlike when Kuroda took office with a clear mandate from Abe and his reflationist advisers to carry out regime change at the BOJ and rid Japan of deflation, whoever succeeds Kuroda will take office with a far more ambiguous mandate. While it is possible to parse Amamiya’s past remarks for hints as to how he would manage this delicate balance – see the effort by Nikkei’s Ishikawa Jun here – I think it is too hard to say with certainty what he would do. The more salient facts about Amamiya may be his commitment to the BOJ as an institution, presumably including its statutory independence, and his lengthy experience with the bank’s monetary policy operations. The consensus also seems to be that he has an extensive network among political and business elites, not without some value in managing the next governor’s agenda.

At the same time, if the case for Amamiya is coherent, it is less clear how exactly Kishida intends to select a new BOJ governor. Again, unlike Abe’s process of selecting a governor in 2013 – after he had campaigned on battling deflation and threatening the BOJ’s independence if it resisted reflationary policies – Kishida has not said much in detail about what he thinks about the future of the BOJ’s unconventional monetary policies. In his 2020 campaign book Kishida Vision, he spent only two pages discussing the first arrow of Abenomics, and the bulk of those two pages is spent summarizing the policies, acknowledging the difficulties the BOJ had faced in achieving its inflation target, and arguing that “unhedged policy shifts carry great risk.” Meanwhile, his final word on monetary policy goes to great lengths to avoid committing to a philosophy or course of action.

So what direction should Japan’s monetary policy take going forward? It is an extremely difficult phase, no matter who is the governor of the Bank of Japan.¹

I am not convinced that Kishida will be any more philosophically inclined now that he actually has to choose a new governor. Ultimately, it seems that Kishida’s pick will mostly be an exercise in risk management, not only the risks swirling around the Bank of Japan but also Kishida himself. With the Abe faction and the LDP right more broadly preparing to battle the prime minister over fiscal policy amidst Kishida’s determination to raise taxes to pay for his government’s defense buildup, they have signaled that the BOJ leadership question is a front in the struggle against a fiscal hawkish turn by Kishida. According to the Sankei Shimbun in January:

A leading figure in the Abe faction has warned the prime minister, "What we are looking for in the next governor is someone like Mr. Kuroda.” When the prime minister announced late last year that he would raise taxes to finance defense spending, there was opposition from members of the same faction who advocate expansionary fiscal policy. If the prime minister makes it clear that he will revise Abenomics in his appointment of a new governor, there is a risk that Abe's faction will turn against him.

While Kishida could pick a critic of Kuroda’s BOJ and Abenomics more broadly – Sankei and other outlets have mentioned Yamaguchi Hirohide, who was deputy governor under Shirakawa Masaaki – the LDP’s conservatives have left little doubt that they would view this as a betrayal that would deepen the growing fissure over macroeconomic policy within the party, if they even let the appointment proceed unhindered in the first place.

Whether because his cautious political style, his general lack of an economic policy philosophy, and the reality that he cannot govern without the Abe faction for the time being, it seems unlikely that Kishida would throw the gauntlet down and risk open rebellion within the party by nominating a candidate like Yamaguchi. Whether the Nikkei story was scoop or trial balloon, it seems likely that Kishida is more likely to opt for Amamiya or Nakaso Hiroshi, Amamiya’s fellow Abe-era deputy governor who has more international background and expertise in financial crises.

But then, as Kishida himself wrote in 2020, “unhedged policy shifts carry great risk.” There’s little reason to think that he will gamble on a bolder choice with his leadership and Japan’s economy hanging in the balance.

1. See pp. 32-33. I have not been able to check whether he added to this in the 2021 update of the book, but I have my doubts.