The fading shadow of reflationists in the Bank of Japan, and the latest addition to the board of an academic favouring an end to ultra-low interest rates, will likely bring the central bank's thinking closer to global peers taking a more conventional approach on monetary policy.
Newcomer Junko Koeda, a 49-year-old academic known as a fiscal and monetary hawk, is likely to reinforce the shift towards higher interest rates and bring fresh thinking into a central bank long focused on reflating growth via huge stimulus.
As the BOJ eyes further rate hikes, academic-turned Governor Kazuo Ueda will see a like-minded ally in Koeda, an economics professor with a Ph.D. from UCLA and a knack for quantitative analysis on the effects of monetary policy.
She would replace one of the "reflationists," or advocates of aggressive monetary easing, who dominated the nine-member board during Governor Haruhiko Kuroda's decade-long experiment that began in 2013 to fire up inflation to its 2% target.
The departure of Seiji Adachi in March will leave just one reflationist, Asahi Noguchi, in the board. With inflation above the BOJ's target for nearly three years, both have already shed their dovish streak and voted for raising rates in January.
The disappearing reflationists, and the scheduled departure of another dovish member Toyoaki Nakamura in June, will tip the board increasingly in favour of steady rate hikes, analysts say.
It would also symbolise how the BOJ is shifting further away from unconventional policy, and reverting to the conventional central banking style of moving short-term rates in accordance to developments in the economy and inflation.
"While Koeda may be balanced on monetary policy, the departure of reflationist-minded members will steer the BOJ further toward policy normalisation," said former BOJ board member Takahide Kiuchi.
"The appointment of someone like Koeda meshes with Ueda's goal of reverting to the conventional style of using short-term rates as the sole tool in guiding monetary policy," said Kiuchi, currently an economist at Nomura Research Institute.
BALANCE SHEET WOES
The BOJ ended negative interest rates and other remnants of Kuroda's radical stimulus last year. While it has moved up short-term rates to 0.5%, it is still saddled with huge asset holdings and is tapering bond purchases at a snail's pace.
With her expertise on monetary policy analysis, Koeda may help deepen the board's debate on how far the BOJ can eventually raise short-term rates, and at what pace it can shrink its huge balance sheet, analysts say.
Having served as a visiting scholar at a BOJ think tank from 2017 to 2018, she is a familiar face at the central bank who has warned of the demerits of prolonged monetary easing, such as eroding fiscal discipline and keeping unprofitable firms alive.
In a model-based analysis in a paper released in 2018, she argued that ending negative interest rates could stimulate - rather than hurt - the economy, and that raising rates before inflation hits 2% won't necessarily cool growth.
A member of a panel advising the finance ministry on debt management, Koeda has called for using more sophisticated means to analyse how big the risk is for Japan to see a spike in bond yields that would boost the cost of funding its huge debt.
"The board reshuffle highlights how the BOJ is shifting its focus away from beating deflation towards tackling problems caused by its decade-long stimulus, such as how to shrink its enormous balance sheet," said former BOJ official Nobuyasu Atago.
"That's a problem that many other central banks are struggling with. The BOJ needs to engage with them and align with global standards," he said. "From this standpoint, Koeda's appointment makes perfect sense."
