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An Aggressive Bank of Japan Sooner Than You Think

Tuesday, 5 Feb 2013 | 10:02 PM ET
A Clean Slate at the BOJ
Richard Jerram, Chief Economist, Bank of Singapore says it makes sense for BOJ Governor Shirakawa to step aside at the same time as his deputies. He discusses who could be the next governor.

The early departure of the Bank of Japan's (BOJ) governor can only mean one thing: aggressive monetary easing from Japan's central bank could now come sooner rather than later.

This certainly seems to be the view in the markets following news late on Tuesday that BOJ Governor Masaaki Shirakawa will step down on March 19, three weeks before his five-year tenure ends in April.

The yen hit a 2-and-a-half-year low versus the dollar and Japanese stocks jumped up to 4 percent on Wednesday on expectations that the early departure of Shirakawa, who analysts say did not share the government's view that the BOJ is responsible for ending deflation, will bring forward a shift in monetary policy.

Up until now, markets were not expecting much action from the central bank until after Shirakawa's term ended in April and were also left a little disappointed after the BOJ said last month it would only start making large-scale asset purchases from the start of next year when its current program ends.

(Read More: BOJ Deputy Governor Signals Further Monetary Stimulus)

"There is a lot of political pressure on the BOJ and this is another big point that we will have to focus on. Certainly there will be a lot of focus on who takes over and how much pressure that person will come under," said Steven Saywell, global head of FX currency strategy at BNP Paribas.

"Clearly it will be someone with a dovish bent; this is what the government wants and certainly we would be looking for more rather than less easing from the BOJ," he told CNBC Asia's "Squawk Box".

Shirakawa will step down on March 19, the date set for the departure of two of BOJ's deputy governors.

Shinzo Abe, who became Japan's prime minister following elections in December, has vowed to revive a stagnant economy and put pressure on the BOJ to pursue a much more aggressive monetary policy than it has done in the past to end deflation. He also made it clear that he would like to see Shirakawa replaced by a central bank governor that will be bolder in implementing a looser monetary policy.

(Read More: Japan May Stop Dragging on Global Growth Finally)

On the list of possible successors to Shirakawa are Haruhiko Kuroda, president of the Asian Development Bank, and former deputy governors Kazumasa Iwata and Toshiro Muto.Former top currency official in Japan Professor Eisuke Sakakibara told CNBC last month that he believed Muto was a strong candidate for the top job at the BOJ.

The Right Move?

Japan's economy, the world's third largest, has contracted for two quarters in a row, pushed into a recession by weak global demand for exports. Deflation meanwhile has dogged the economy for years and the central bank has in the past shown reluctance to aggressively ramp up asset purchases in the way the U.S. Federal Reserve has done to kick start economic growth.

Bank of Japan governor Masaaki Shirakawa meets with the press on February 5 to announce he is stepping down about three weeks before his term ends.
Kazuhiro Nogi | AFP | Getty Images
Bank of Japan governor Masaaki Shirakawa meets with the press on February 5 to announce he is stepping down about three weeks before his term ends.

Replacing Shirakawa with a more dovish central bank governor would be the right move, some analysts said.

"There's been no accountability at the BOJ, so it makes sense to have some accountability and some political influence," Bank of Singapore's Chief Economist Richard Jerram told Squawk Box.

"If you've had 15 years of deflation, you can't point at real economic problems, there is a monetary dimension to the large part of the deflation. There's a lot to do, but starting with deflation is not a bad place to start," Jerram added.

To other Japan observers, an aggressive monetary policy could backfire if inflation starts to rise quickly.

"They are going to have inflation on their hands and consumer prices will rise to a point where there will be pressure on the BOJ to tighten," said Peter Schiff, CEO at Euro Pacific Capital. "Inflation could be higher than 2 percent, so this policy could backfire on Japan."

Last month the BOJ adopted a 2 percent inflation target and made an open-ended pledge to pump trillions of yen into the economy via asset purchases from 2014.

(Read More: From Cautious to Bold, Can the Bank of Japan Deliver?)

More Yen Weakness

Analysts said the yen, which has fallen sharply in recent months on expectations of aggressive monetary easing in Japan, would now face further selling pressure.

The yen has shed almost 9 percent so far this year, making it the world's worst performing major currency, followed by the British pound which is down about 3.5 percent.

"Shirakawa was viewed as a reluctant participant in Prime Minister Abe's plan to reflate the Japanese economy and sharply weaken the yen. His departure will now pave the way for a more accommodating monetary policy and perhaps fuel the rise in dollar/yen towards the 95 level as the markets continue to respond to Mr. Abe's policy changes," Boris Schlossberg, managing director of FX Strategy at BK Asset Management, said in a note.

The yen stood at about 93.75 per dollar on Wednesday.

(Read More: Yen Meddling – What Has Japan Started?)

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