Market fireworks to say goodbye to H. Kuroda. The volatility for JPY is impressive

Jerome Powell has been the focus of the markets' full attention recently, but in a broader context, what is happening outside Fed and how other central banks are dealing with their challenges. The activities undertaken there are also of great importance for international markets. This applies primarily to the central banks of China and Japan, with this article focusing on the Japanese central bank.

The risk of volatility increases with the end of the Kuroda era

Outgoing governor Bank of Japan (BOJ), Haruhiko Kuroda, has ensured a period of consistency and his departure could shake markets as it is impossible to say exactly how the new central bank chief will respond to the challenges in Japan's monetary policy. Against this backdrop, Fed Chairman Powell will also need to be careful and adjust his monetary policy to developments in Japan, as Japan is one of the largest buyers of US government bonds.

https://twitter.com/CMCMarkets_PL/status/1633756369370198022

Of course, it's far too early to announce the end of an era, but in Japan it really looks like a momentous change is coming. Tonight Haruhiko Kuroda will be chairing his last meeting as governor of the Bank of Japan and the market is expecting a very volatile session for the yen today.

Ueda is the new head of the BOJ

One gets the impression that the financial markets have mixed views on the political stance of the new BOJ chief, Ueda. With the first news of the nomination, the yen strengthened and long-term interest rates rose on speculation about a change in policy. However, Mr. Ueda's comments to the media that "further monetary easing is necessary" led some to believe that he was holding off on changing monetary policy, and the yen weakened significantly again in the foreign exchange market.

The implication of this is that Ueda is distancing himself from Governor Kuroda's political stance, and therefore the assumption of an earlier or later monetary policy adjustment in Japan is quite plausible as Japan is also currently struggling with higher inflation. K.Ueda so far, he doesn't argue with Kuroda, but he seems to soberly analyze the effects and side effects of individual actions like a scholar. He will probably maintain this attitude when he is the head of the central bank.

The new governor faces great challenges

The first monetary policy action the BOJ will take under the new governor is likely to be a comprehensive revision of the YCC (yield curve control), perhaps by further widening the yield volatility band or removing it altogether. However, the earliest possible date for this is probably mid or end of April.

A second measure could be to change the inflation target from 2% to a medium to long-term (higher) target, for example to make monetary policy more flexible and create an environment conducive to normalisation. However, since implementing this also requires coordination with the government, this project may take some time. However, it is likely that raising the inflation target from 2% to 3% will also be discussed, as Ueda could also go dovish and want to give the market more stimulus. This would then be perceived as a kind of test for other central banks, similarly as it was already in the case of QE, as there are also voices calling for inflation to remain high.

The third point will be the abolition of negative interest rates and YCC, but these can only be introduced after the improvement of the economic and financial environment. Then, in the following years, quantitative tightening measures are likely, such as a decrease in JGB bond holdings and a decrease in holdings ETFs.

A normalization of monetary policy during the tenure of the new governor of Ueda cannot be ruled out, although at this stage it is far from certain. The yen appears to be battered and further devaluations are inevitable if Japan maintains its ultra-loose monetary policy. In principle, it is also important in Japan to create a foundation that will keep Japan's great monetary experiment in check and also make the heavy burden of monetary policy normalization more bearable for future BOJ governors.

Basic data on the Japanese economy:

• GDP: increased in the fourth quarter of 2022 by 0,60 percent over the same quarter of the previous year. QoQ GDP amounted to 0,0 percent.
• Unemployment rate: amounted to 2,4 percent. in January 2023
• Inflation: Japan's annual inflation rate increased to 2023% in January 4,3 from 4,0% in the previous month. It was the highest reading since December 1981.
• Monetary policy: The Bank of Japan (BoJ) unanimously kept its key short-term interest rate at -0,1% and the 10-year bond yield near 0% during its January meeting. The central bank also maintained its 0,5% limit on bond purchases.