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Takeaway: A confirmation of Haruhiko Kuroda as the next BOJ governor is explicitly bearish for the Japanese yen over the intermediate-to-long term.

SUMMARY BULLETS:

 

  • Regarding the aforementioned question, we can’t be more explicit in stating that this is precisely the “dovish [political] puppet” we thought current BOJ Governor Masaaki Shirakawa would eventually be replaced by early in the chronicles of our ultra-bearish thesis on the Japanese yen. Under the assumption that he is the new face of BOJ leadership, Japanese monetary policy will get a lot more aggressive over the intermediate term, as Kuroda has been openly supportive of the LDP’s drive to achieve “+5% monetary math”.
  • For example, in 2002 he co-authored an op-ed piece calling for the aggressive pursuit of a +3% inflation target in Japan, as well as globally-coordinated Policies To Inflate. It should also be noted that he was formerly a career Japanese bureaucrat, entering the Ministry of Finance in 1967, eventually rising to succeed Eisuke Sakakibara as Vice Finance Minister for International Affairs (i.e. Japan’s top currency market official). It was from Sakakibara a.k.a. “Mr. Yen” himself that Kuroda learned the skills necessary to contend and ultimately record “victories” in today’s global Currency War.
  • From our interpretation of the legacy media coverage of this trade, it seems like there are a number of investors and Old Wall pundits who now think the down-yen trade has played itself out and that the balance of risks points to a sideways/stronger yen from here amid likely BOJ policy disappointments. Much to the contrary, and within the context of our structural bullish bias on the USD, we continue to think the long USD/JPY trade is still in the early innings. In fact, we continue to see the next “stop” as ¥100 per USD w/ upside risk to ¥125 per USD over the long-term TAIL. We remain the bears on the Japanese yen, with the JPY now down -17% vs. the USD from when outlined the first components of our bearish thesis back on 9/27.

It has been widely reported this weekend that the Abe government has selected Asian Development Bank head and former Finance Ministry official Haruhiko Kuroda as its candidate to replace Masaaki Shirakawa as the next governor of the BOJ when the latter’s term expires on MAR 19.

Additionally, Reuters also cited comments from Japanese academic Kikuo Iwata stating that he has been asked to be a deputy governor of the BOJ (he also noted that he would accept the nomination). There is also talks that senior BOJ official Hiroshi Nakaso will also be nominated for the other deputy governor position. 

It should be duly noted that any news on the candidacy front still speculation, as Economics Minster Akira Amari stated he had not yet heard from Shinzo Abe regarding these choices – at least not yet. Finance Minister Taro Aso was, however, out this weekend suggesting that Kuroda, 68, would be the “correct choice” as the next head of the Bank of Japan.

Under the assumption that  these are the likely new faces of BOJ leadership, Japanese monetary policy will get a lot more aggressive over the intermediate term. Each of the three candidates are said to be explicit doves and supportive of the LDP’s drive to achieve “+5% monetary math”.

THE MARKET AGREES

This morning, 5Y JGB yields hit another record low (0.123%) on speculation one of the BOJ’s first steps towards achieving the inflation target under the new regime would be to increase the duration of its sovereign debt purchases, as their current policy of buying debt maturing in less than three years is the functional equivalent of swapping cash for cash – it’s no wonder Shirakawa’s BOJ hasn’t been able to help Japan overcome deflation in an era of all-time highs in natural resource prices.

#QUADRILL-YEN: WHO IS HARUHIKO KURODA? - 1

Five-year breakeven inflation rates also hit another all-time high this AM as well (1.26%), as a Kuroda-led BOJ would be particularly supportive of rising inflation expectations in Japan. As recently as FEB 11th, he was out suggesting that the BOJ has “really substantial room for monetary easing” and that “the global standard for achieving inflation targets was a two-year time horizon”.

#QUADRILL-YEN: WHO IS HARUHIKO KURODA? - 2

IS THIS A DONE DEAL?

Early media speculation suggests the DPJ is expected to support Kuroda’s candidacy in the Upper House (meaning he’ll eventually secure the job officially), but we’re still skeptical in the lack of further evidence on this front. Even if the DPJ doesn’t support Kuroda and/or any of the other two perceived LDP candidates, that doesn’t necessarily mean their candidacy is void. It simply means that the LDP and NKP coalition (83 and 19 seats, respectively) will have to gain the support of smaller regional parties instead.

Eleven votes from Your Party – which has rhetorically aligned themselves with the LDP-NKP platform on this agenda – would put them at 113 seats, leaving them 9 seats shy of a decisive victory, but still well within reach because we think the smaller parties will be more inclined to associate themselves with the LDP’s drive to reflate the Japanese economy ahead of the JUL ’13 Upper House elections, rather than side with the DPJ, which was blown out in the DEC Lower House elections.

#QUADRILL-YEN: WHO IS HARUHIKO KURODA? - Japan House of Councillors

WHO IS HARUHIKO KURODA?

Going back to our original question: “Who is Haruhiko Kuroda?”, we can’t be more explicit in stating that this is precisely the “dovish [political] puppet” we thought current BOJ Governor Masaaki Shirakawa would eventually be replaced by early in the chronicles of our ultra-bearish thesis on the Japanese yen.

For example, in 2002 he co-authored an op-ed piece calling for the aggressive pursuit of a +3% inflation target in Japan, as well as globally-coordinated Policies To Inflate:

“The BoJ would have to adopt innovative, non-traditional anti-deflationary policies. These should include an explicit inflation target of 3 per cent to be achieved in stages - such as 1 per cent inflation within a year, and 2-3 per cent within the following two years. The BoJ clearly needs to provide more liquidity to the market and constantly increase base money through purchases of long-term government bonds and other financial instruments. A tripartite strategy for global reflation would bring major benefits to the world economy with minimum cost.”

-Haruhiko Kuroda, DEC ‘02

It should also be noted that he was formerly a career Japanese bureaucrat, entering the Ministry of Finance in 1967, eventually rising to succeed Eisuke Sakakibara as Vice Finance Minister for International Affairs (i.e. Japan’s top currency market official) in 1999. It was from Sakakibara a.k.a. “Mr. Yen” himself that Kuroda learned the skills necessary to contend and ultimately record “victories” in today’s global Currency War.

WHERE TO FROM HERE?

Make no mistake, it remains Japan’s “turn” to take center-stage in this drama, as per our relative analysis of G3 post-crisis monetary policy:

#QUADRILL-YEN: WHO IS HARUHIKO KURODA? - 4

From our interpretation of the legacy media coverage of this trade, it seems like there are a number of investors and Old Wall pundits who now think the down-yen trade has played itself out and that the balance of risks points to a sideways/stronger yen from here amid likely BOJ policy disappointments.

Much to the contrary, and within the context of our structural bullish bias on the USD, we continue to think the long USD/JPY trade is still in the early innings. In fact, we continue to see the next “stop” as ¥100 per USD w/ upside risk to ¥125 per USD over the long-term TAIL. We remain the bears on the Japanese yen, with the JPY now down -17% vs. the USD from when outlined the first components of our bearish thesis back on 9/27.

Darius Dale

Senior Analyst