I'm LongbridgeAI, I can summarize articles.The cabinet of Prime Minister Kishi has nominated two new candidates for the Bank of Japan's Policy Board, both of whom hold dovish positions, which may affect the pace of interest rate hikes. In the short term, the probability of rate hikes has decreased, and the market generally believes that the conditions for rate hikes are not yet mature, with expectations for the timing of rate hikes being postponed to the latter half of 2026. Both candidates align with Kishi's economic policy philosophy, and if their nominations are approved, they will begin participating in voting in April and July
On February 25, the cabinet of Prime Minister Fumio Kishida submitted two new candidates for the Bank of Japan's Policy Board to the National Diet: Emeritus Professor Toru Asada of Chuo University and Professor Ayano Sato of Aoyama Gakuin University, intended to replace Akira Noguchi, whose term ends at the end of March, and Junko Nakagawa, who will step down at the end of June.
According to the Wind Trading Desk, the Morgan Stanley MUFG team and Goldman Sachs believe that both nominees hold distinct inflation-dovish positions that align closely with Kishida's economic policy philosophy. This personnel arrangement may change the internal policy inclination of the Bank of Japan, thereby affecting the pace of interest rate hikes.
In the short term, the addition of these two dovish members significantly reduces the probability of the Bank of Japan raising interest rates in April or June this year. One of the candidates, Ayano Sato, has explicitly advocated that "a weak yen is beneficial for the Japanese economy," a stance that may bring downward pressure on the yen exchange rate in the short term. Institutions generally believe that the conditions for raising interest rates are not yet mature, with Morgan Stanley maintaining its baseline forecast for a rate hike in June and viewing July as a risk scenario, while Goldman Sachs firmly holds the judgment for a rate hike in July. Summer has become the consensus rate hike window in the market, indicating that the timing for rate hikes is expected to be postponed until mid to late 2026.
Regarding the prospects for the implementation of this personnel change, Morgan Stanley pointed out that the names of the two candidates had not been widely circulated in the market prior, giving it a certain "surprise" quality, reflecting the current government's tight information management intentions. Goldman Sachs added that although the ruling coalition lacks a majority in the House of Councillors, as long as any opposition party votes in favor, the nomination is unlikely to be rejected. If the nominations are smoothly approved, Asada will begin participating in votes starting from the monetary policy meeting in April, while Sato will officially join the policy decision-making process from July.
Candidates' Background: Anti-tightening Scholars and "Weak Yen" Supporters
Both candidates have shown distinct dovish and anti-tightening colors in their past public statements, aligning closely with Kishida's economic policy philosophy.
Emeritus Professor Toru Asada of Chuo University is a macroeconomist known for his anti-tightening fiscal stance, having advocated for "helicopter money" in 2016 and suggested amending the Bank of Japan Act to align central bank policies with government economic goals.
In 2021, he proposed that the Japanese government bonds held by the Bank of Japan should not be counted as government liabilities, arguing that the central bank is part of the broader government. As early as 2015, he pointed out that to achieve the nominal GDP target of 600 trillion yen in "Abenomics," sustained inflation and growth are necessary, and fiscal and monetary policies must be fully deployed in coordination.
The other candidate, Professor Ayano Sato of Aoyama Gakuin University, approaches from an academic research perspective, using OECD panel data to analyze the promoting effect of a high-pressure economy on labor productivity. In 2023, she clearly stated in a speech to the Liberal Democratic Party's parliamentary group that a weak yen is beneficial for the overall Japanese economy by improving the trade balance and encouraging the return of production bases. She also advocates for actively utilizing the surplus from special accounts such as foreign exchange reserves to support fiscal expenditures, emphasizing that as long as inflation and long-term interest rates remain low, there is still room for further issuance of government bonds, and tax increases should be a last resort. In her view, the current stage should continue to maintain an accommodative monetary policy to support sustained economic expansion.
Investment Bank Outlook: Higher Threshold for Rate Hikes, Summer Becomes a Key Game Period
Currently, apart from Governor Kazuo Ueda, the overall impression of the Bank of Japan's policy committee is "hawkish dominance." Morgan Stanley believes that the addition of two dovish members will to some extent promote more active discussions in policy meetings, making the exchange of opinions in the decision-making process more thorough.
Morgan Stanley believes that since recent CPI data has not shown sufficient strength, the Bank of Japan needs to wait for the April inflation data to be released in May to further confirm the actual effect of wage growth on price transmission, therefore, it is still early for a rate hike in March or April. The institution maintains its baseline forecast for a rate hike in June and considers July as a risk scenario, expecting that after the policy rate reaches 1%, the Bank of Japan will enter a long-term wait-and-see phase, with the next rate hike possibly not occurring until April 2027.
Goldman Sachs pointed out that although the remaining committee members are likely to continue supporting Governor Ueda's rate hike proposal, the voting results may not undergo significant reversal. However, according to Article 4 of the Bank of Japan Act, monetary policy must align with government economic policy, and this legal framework means that the threshold for further rate hikes in the future is actually higher than previously expected.
Goldman Sachs specifically reviewed the historical lesson from August 2000 in its report. At that time, the government explicitly requested to postpone rate hikes, but the Bank of Japan rejected the government's request by a majority vote, insisting on raising the policy rate from 0% to 0.25%. Subsequently, the bursting of the U.S. internet bubble dragged Japan into recession, and the central bank faced fierce criticism from Congress and the media. Considering that the Governor of the Bank of Japan is required to testify in Congress for dozens of days each year, this number has remained high at 40 to 80 days in recent years, these political and economic factors will prompt the Bank of Japan to avoid direct friction with the government when formulating monetary policy to prevent repeating past mistakes.
The bank maintains its baseline judgment for the next rate hike in July, believing that the probability of an earlier rate hike in April or June has decreased. At the same time, Goldman Sachs also issued a warning that if the rate hike is delayed until after July, the central bank will face the risk of falling behind the yield curve, which may ultimately force the terminal rate to rise to a restrictive level exceeding 1.5%.
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