Japan names academic Kazuo Ueda as next central bank governor

Kazuo Ueda, professor of Graduate School of Economics at The University of Tokyo, speaks during the Institute of International Finance (IIF) Spring Membership Meeting in Tokyo, Japan, on Tuesday, May 9, 2017. Over 500 participants from around the globe gather for the 2-day meeting to discuss the critical issues in the financial industry.

Japan's government named academic Kazuo Ueda as its pick to become next central bank governor, a surprise choice that could heighten the chance of an end to its unpopular yield control policy.

Ueda, a 71-year-old former Bank of Japan policy board member and an academic at Kyoritsu Women's University, will succeed incumbent Haruhiko Kuroda, whose second, five-year term ends on April 8, according to documents presented to parliament on Tuesday.

The appointment of Ueda, which was first reported by the Nikkei newspaper and confirmed by Reuters on Friday, came as a surprise to many investors who expected the job to go to a career central banker like deputy governor Masayoshi Amamiya.

International markets have been closely watching Prime Minister Fumio Kishida's choice of next BOJ governor for clues on how soon the bank could phase out its yield curve control (YCC) policy.

The leadership transition marks a historical end to Kuroda's decade-long monetary experiment that sought to shock the public out of a deflationary mindset, and could eventually align Japan with other major economies toward higher interest rates.

With inflation exceeding the BOJ's 2% target, Ueda faces the delicate task of normalising its prolonged ultra-easy policy that has drawn increasing public criticism for distorting market function and crushing bank margins.

Data released on Tuesday showed Japan's economic rebound in the final quarter of last year was weaker than expected, underscoring a fragile recovery that is facing headwinds from slowing global growth.

Analysts expect Ueda, who had warned of the dangers of premature rate hikes in the past, to hold off on tightening monetary policy but dismantle YCC sooner than later.

"I don't think Ueda will idly continue a policy that didn't work and showing increasing side-effects," said Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities.

The government also nominated Ryozo Himino, former head of Japan's banking watchdog, and BOJ executive Shinichi Uchida as deputy governors, the documents showed.

They will replace incumbents Amamiya and Masazumi Wakatabe, whose five-year terms end on March 19.

The nominations need the approval of both chambers of the Diet, which is effectively a done deal since the ruling coalition holds solid majorities in both chambers.

The governor and deputy governor nominees will testify at confirmation hearings to be held on Feb. 24 for the lower house, and Feb. 27 for the upper chamber.

Inflation hit 4% in December, double the BOJ's 2% target, pushing up bond yields and challenging its resolve to defend YCC, a policy that sets a 0.5% cap on the 10-year bond yield.

With markets creaking under the BOJ's heavy-handed intervention, many investors are betting the central bank will start hiking rates under Kuroda's successor.

In an opinion piece in the Nikkei last July, Ueda warned against prematurely raising rates in response to inflation driven mostly by cost-push factors.

But he also wrote the BOJ must eventually consider how to exit its ultra-loose policy, pointing to the potential flaws of YCC such as the difficulty of maintaining the yield cap when inflation perks up.