Ueda Confirmed as JPY Outperforms

USD/JPY Overview

The pair was trading at around 131.60 on Friday morning when news broke that the government would nominate Kazuo Ueda to be the next BoJ Governor. We have since seen USD/JPY plunge 1.4% quickly but has since recovered and now after the formal nomination of Ueda, USD/JPY is about 154pips higher from when this all started.

That reflects the realisation that there may be very little difference between Ueda and the candidate expected, Deputy Governor Amamiya. Reports in Tokyo suggest that after turning down the role himself, Amamiya suggested Ueda as the best candidate to take the position. That would suggest the potential for policy continuity as does the confirmation of Shinichiro Uchida as Deputy Governor (close colleague of Amamiya). So, it’s all as expected based on the news provided on Friday and hence there is no reason to expect any spike in volatility. The Diet hearings will now be the key moment for the markets to hear more on Ueda’s views but based on available information it is unlikely we will see too much divergence and importantly Ueda will likely stress the need for time to assess the next steps to be taken.

I still hold a clear bias for the yen to strengthen. That was our view based on Amamiya getting the position and that won’t change under Ueda. YCC is still past its sell-by-date and needs to be removed and there is no better person than someone who has had no association at all with the design and implementation of the policy. Speculation is likely to quickly shift to the potential content of any updated Joint Statement that defines the target of the BoJ and the relationship with the government in achieving that. First agreed in 2013 between Governor Kuroda and PM Abe, it needs reshaping. A shift in the definition of price stability to something more flexible would immediately harden speculation on a shift in policy away from the period of ubereasing. Let’s see what the ‘shunto’ wage agreements bring and of course let’s see how US and global inflation unfolds over the coming months, but the fundamental backdrop in our view remains favourable for yen strength – it may be more orderly than initially believed on the news of Ueda’s nomination but it will still be in the same direction.

Loss of Rising Steam

JPY started rebounding since December 20th last year after the BoJ widened YCC band unexpectedly. Since then, JPY became the strongest currency in majors and rose nearly 10% in nominal effective exchange rate (Exhibit 1). However, in the past one month since last KCV published on January 13th, JPY turned to be one of the weakest currencies among majors, especially after the BoJ stayed on hold on January 18th . In addition, JPY declined further after Nikkei reported that Deputy Governor Amamiya is asked to be the next BOJ governor on February 6th (Exhibit 2).

For a period of time, whether JPY weakness continues or not is likely to depend on the BoJ monetary policy. Japanese government was officially announced as I mention above now candidates will need to face the Diet committee and speak about their thoughts on monetary policy, then obtain the consent from the Diet. These Diet committee sessions are likely to be held on February 24th.

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