Yen and Japanese government bonds on high alert! The Takashi Cabinet is about to announce the central bank committee members—will the aggressive easing faction come to power?

Japan’s Prime Minister Sanae Takaichi’s upcoming nomination of a new member to the Bank of Japan Policy Board is becoming a key window for market analysis of her monetary policy intentions. This personnel decision will reveal how much influence Takaichi hopes to exert in guiding the central bank’s policy direction.

According to Bloomberg, citing informed sources, Takaichi may propose replacing two current members—Hajime Noguchi and Junko Nakagawa—at the upcoming parliamentary session on February 25. Noguchi’s five-year term will end in late March, while Nakagawa’s term expires on June 29.

Although these nominations require approval from both houses of Parliament, and Takaichi’s ruling Liberal Democratic Party does not hold a majority in the House of Councillors, adding uncertainty to the process, the market generally believes that her choices will still clearly signal policy intentions.

A Bloomberg survey last month showed that 63% of BOJ observers expect Noguchi’s successor to have a strong reflationary bias. The core issue revolves around the dovishness of the two nominees. Under the current political landscape, it is almost impossible for Takaichi to select hawkish candidates. If radical easing advocates succeed in gaining positions, the yen exchange rate and Japan’s government bond market could experience a new wave of volatility.

Personnel Choices and Market Pressure

If Takaichi simultaneously appoints two reflationary advocates to the BOJ Policy Board, market anxiety may intensify. Investors worry that even though Japan’s inflation rate has exceeded the BOJ’s 2% target for four consecutive years, Takaichi might attempt to slow the pace of rate hikes and further expand fiscal spending to stimulate the economy. Both positions being filled by strong proponents of monetary easing could trigger a sharp depreciation of the yen and a surge in bond yields.

Former BOJ Policy Board member Makoto Adachi stated this week:

“If she really wants to prevent the yen from weakening or long-term bond yields from rising, it’s better not to choose reflationary advocates.”

Takaichi is known for supporting stimulus policies, favoring economic growth, and being cautious about rate hikes. 2024 is the year before she becomes Prime Minister. She previously publicly stated that rate hikes by the BOJ at that time would be “foolish.” Since taking office in October last year, she has appointed several reflationary advocates to her economic advisory group, including former Deputy Governor Masumi Wakatabe and Katsuya Takahashi. Both were her mentors and appointees of former Prime Minister Shinzo Abe.

Post-Inauguration Remarks Turn Cautious

Despite high market sensitivity to her personnel decisions, Takaichi has increasingly avoided discussing specific monetary policy details since taking office. BOJ Governor Kazuo Ueda revealed that during a one-on-one meeting at the Prime Minister’s residence on Monday, Takaichi did not raise any concrete policy demands.

In terms of fiscal policy, the Prime Minister’s recent statements have also become more cautious. Earlier, her promise to temporarily suspend the consumption tax hike on food caused bond market turbulence in late January, after which she toned down related comments.

Takaichi’s election victory has strengthened her political mandate. Her ruling LDP secured more than two-thirds of the seats in the House of Representatives, consolidating a government that previously operated with a narrow majority. This significant victory, combined with cautious post-election rhetoric, has effectively reassured market participants.

At her press conference the day after the February 9 election victory, she emphasized that her proactive fiscal policy will be “responsible” and explicitly stated that any consumption tax cuts would not be financed through additional debt issuance. This statement aims to ease market concerns about loosening fiscal discipline.

Committee Composition and Balance

Some BOJ observers believe that even if Takaichi chooses strong easing advocates to replace Noguchi, the overall impact on the policy board’s structure will be limited. Noguchi himself is inclined toward stimulus, having voted twice against rate hikes. Replacing one dovish member with another does not alter the existing balance of power.

In contrast, the successor to Junko Nakagawa is of greater interest. A former executive at Nomura Holdings, Nakagawa generally follows the consensus of the board. Since the BOJ’s large-scale easing experiment ended in March 2024, she has consistently voted in favor of rate hikes. If her seat is filled by a reflationary advocate, the tilt of policy could become more pronounced.

It is expected that personnel appointments will maintain the current gender balance, continuing the trend of last year’s first-time inclusion of two women on the board. This reflects progress toward gender equality.

Takaichi’s victory provides greater room for her long-term policy layout. By spring 2028, the terms of BOJ Governor Kazuo Ueda and Deputy Governor Shinichi Uchida will expire simultaneously. If she remains in office, Takaichi could lead a new round of key personnel appointments, further shaping the future direction of the central bank.

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