What Could Change at the Helm of BoJ Mean for Yen?

USD/JPY moved higher earlier this week on rumors that the Japanese government has approached Bank of Japan (BoJ) Deputy Governor, Masayoshi Amamiya, regarding the possibility of succeeding current Governor Haruhiko Kuroda, according to Nikkei Asia.

The appointment of the next BoJ governor has become an important issue in Japan, as the new governor faces the tough task of normalizing the BoJ’s ultra-dovish monetary policy that continues to attract criticism for disrupting market function.

How Does the Market Feel About Amamiya?

Amamiya, a seasoned central banker who has played a key role in drafting many of the BoJ's monetary easing measures, is widely considered a top contender for the governor's position. Prime Minister Fumio Kishida's administration is currently finalizing the selection process for the next governor and two deputy governors and is engaging in talks with the ruling coalition.

The government's nominations are set to be presented to the parliament later this month, with approval expected to be a formality due to the ruling coalition's majority. While the Nikkei report did not mention whether Amamiya had accepted the offer, Finance Minister Shun'ichi Suzuki stated that he had not been informed of any such offer, conflicting with the Nikkei’s report. Deputy Chief Cabinet Secretary Yoshihiko Isozaki also denied the reports during a news conference on Monday.

Kuroda’s 5-year term is set to expire on April 8, and the choice of his successor is also likely to influence how quickly the BoJ can phase out its unprecedented stimulus. Inflation rose to 4% in December, still significantly above the central bank’s target of 2%.

Nikkei’s report sent the U.S. dollar to as high as 132.60 yen at one point as Amamiya is considered a more dovish candidate compared to other contenders for the BoJ’s top position. His appointment would annoy investors who remain bullish on the yen and are hoping that a more hawkish contender will replace Kuroda. One such candidate is the former deputy governor Hirohide Yamaguchi, according to Pepperstone head of research Chris Weston.

“Amamiya, if (he) accepts, will have full reign on policy changes and the idea of policy continuation is true here,” Weston said.

Amamiya was one of the key people who drafted Kuroda’s asset-buying plan in 2013 and has been a vocal proponent of ultra-dovish monetary policy over the years. However, he also said last year that the BoJ must always explore means to phase out the ultra-dovish monetary policy.

‘Monster’ Jobs Report Pauses Dollar Bleeding

The U.S. dollar rose against a basket of currencies on Friday following a much stronger-than-anticipated January jobs report, which could encourage the Federal Reserve to continue raising interest rates in the months ahead.

According to the report, nonfarm payrolls spiked by 517,000 jobs in January, almost twice as high as the 260,000 jobs that were reported in December 2022, and smashing the economists’ expectations of 185,000 jobs. Average hourly earnings increased by 0.3% last month, following a 0.4% jump in December. Year-over-year, the earnings surged by 4.4% in January, down from 4.8% in December.

At Tuesday’s event, Fed Chair Powell warned investors that the Fed is still braced for a long fight to cool inflation down. He also commented on Friday’s jobs report.

“We didn’t expect it to be this strong,” Powell said of the January jobs report. “It kind of shows you why we think that this will be a process that takes a significant period of time.”

Marc Chandler, head market strategist at Bannockburn Global Forex, described the report as a “monster number.” Such a sharp increase in payroll figures reduced traders’ expectations that the Fed would stop raising interest rates following a 25 basis points hike last week, the smallest since March.

Chandler said:

"After the Fed meeting it looked like markets had the advantage - it was still pricing in a rate cut, they took interest rates down, and they took the dollar down, and now I think 48 hours later the Fed looks like they might have the upper hand again."

After hiking rates by just 25 bps last week, the Fed said it had likely won a key battle against record-high inflation, allowing investors to hope for a more dovish approach in the future. This prompted a recent rally in stocks while the greenback rotated lower to give up all gains since May last year.

In December, U.S. central bank officials said they expected to hike the benchmark overnight interest rate above 5%, emphasizing they must hold it in restrictive territory for a certain period in order to bring down inflation in a sustainable manner. However, the market had bet the rate will peak below 5% and that the central bank will likely slash rates in the second half of the year as U.S. economic growth slows.

Summary

The major currency pair USD/JPY has moved modestly higher in recent days on a report the Japanese government is considering BoJ Deputy Governor Masayoshi Amamiya to replace Governor Kuroda in April. Moreover, a much stronger-than-expected U.S. jobs report sent the dollar higher on Friday as investors fear that the Fed won’t stop raising rates given the continued economic strength.

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Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.