As the coronavirus crisis stokes fears of a return to deflation, the Bank of Japan faces changes in its nine-member board in coming months that could tip the balance in favour of aggressive monetary easing.
TWO MEMBERS TO SEE TERM EXPIRE
Parliament approved the government's nominee Asahi Noguchi, an academic known as a vocal advocate of heavy money printing, to replace Makoto Sakurai, who has warned of the rising costs of prolonged easing, when his term ends in March. read more
That gives reflationist-minded doves four of nine seats in the BOJ board, enough to shoot down Governor Haruhiko Kuroda's proposals if there is a single swing vote.
There is also uncertainty on who will succeed Takako Masai, whose expires in June.
The BOJ's decision-making board consists of a governor, two deputy governors and six board members. The governor has come from either within the BOJ or the powerful Ministry of Finance (MOF), while one of the two deputies has traditionally been a career central banker.
The board is usually composed of a handful of academics, as well as representatives from the banking sector, non-financial corporate sector and a single female member.
All board members, including the governor, are nominated by the government and approved by parliament for a five-year term.
ECONOMY BATTLING COVID-19 PAIN
The changes on the board come as Japan's economy is struggling to emerge from the pain caused by the coronavirus pandemic, which triggered the worst postwar recession in the second quarter last year.
The world's third-largest economy is likely to suffer another contraction in the January-March quarter as new virus state of emergency curbs rolled out in January hurt consumption.
DEFLATION RISKS LOOM
The bigger presence of doves in the BOJ board may also prod them to call for bolder steps to combat the risk of deflation, as companies struggle to raise prices due to weak consumption.
The doves had all been vocal critics of the BOJ's policy before Kuroda deployed his "bazooka" stimulus programme in 2013 to fire up inflation to his 2% target.
With the target proving elusive, they must now find a better way to reflate growth and inflation.
LITTLE AMMUNITION LEFT
The challenge of pulling Japan out of the doldrums is much bigger now than in 2013, as years of heavy money printing have saddled the BOJ with a huge balance sheet and pushed interest rates below zero.
With the cost of prolonged easing accumulating, the BOJ has been steadily slowing its purchases of government bonds and risky assets such as exchange-traded funds (ETF).
The BOJ will unveil in March a plan to make its policy framework more sustainable, given prospects of a protracted battle with low growth and subdued inflation.
But the dovish-leaning board could complicate the BOJ's efforts to taper its asset buying.
(For a graphic on BOJ board members' views on stimulus, click here: https://tmsnrt.rs/3qjrZMh)
