FX.co ★ Kazuo Ueda is not the one the yen was waiting for

Tomorrow the Japanese government will announce the person who will succeed Haruhiko Kuroda, who headed the Bank of Japan for almost 10 years. If the rumors are confirmed and economist Kazuo Ueda is nominated for the post, the yen risks going into a downward spiral.

The Nikkei Asian Review reported on Friday that the Japanese Cabinet is set to appoint Kazuo Ueda as the next BOJ Governor.

This news came as a complete surprise to the market. First, many traders had already almost resigned themselves to the fact that the next BOJ chairman could be dovish official Masaeshi Amamiya. And second, Ueda did not appear on any of the lists of potential candidates.

The probability of a dark horse was initially greeted very enthusiastically by the yen bulls.The exchange rate of Japanese currency jumped sharply against the dollar. The JPY gained more than 1% in the first half of Friday and reached a weekly high around 129.80.

Most analysts believe that yen bulls were greatly encouraged by the fact that the most dovish candidate dropped out of the short list of contenders. The Nikkei wrote that Amamiya refused to take the governor post.

That comment allowed investors who were long on the yen to breathe a sigh of relief. Speculation that the new BOJ head might begin to normalize the country's monetary policy has erupted with renewed vigor in the market.

However, the bulls' joy seems to have been premature as Ueda leaves dovish remarks.

When reporters asked him on Friday what course he would take if he became the next governor of the BOJ, Ueda stated that the current monetary policy is appropriate and the loose monetary policy should be continued

This statement sent the yen down to earth. In the afternoon, the USD/JPY rebounded nearly 140 pips from its weekly low of 131.00.

At the start of the new working week, the pair fueled the uptrend. At the time of writing, the dollar strengthened against its Japanese counterpart by more than 0.6% and broke the key threshold of 132.

According to analysts, the pair could sharply rise tomorrow as the Japanese parliament is set to present its candidate for the governor post.

If Japanese authorities opt for Ueda, the yen will be under considerable pressure. Over the weekend, the media collected quite an impressive dossier on the candidate and got even more evidence that he is not the one the JPY has been waiting for. Let's take a look at what we know about him.

The 71-year-old is widely seen as an expert on monetary policy. A holder of an economics PhD degree from the Massachusetts Institute of Technology (MIT), taught at the University of Tokyo for a long time, and is currently a professor at Kyoritsu Women's University in Tokyo.

Ueda was a board member of the BOJ from 1998-2005. When the BOJ tried to abandon its zero interest rate policy in the early 2000s, he voted against the decision.

Recently, the official has often moderated various seminars and conferences organized by the BOJ, and quite rarely made statements to the press.

Nevertheless, in June 2022, when the yen was already feeling the strong pressure of monetary divergence between the BOJ and other major central banks, Ueda gave an interview to the Nikkei. Here are the key excerpts from it:

On the pivot

"The Bank of Japan should have a gradual exit strategy from ultra-soft policy. In the past the Federal Reserve in the 1950s and the Reserve Bank of Australia in 2021 exited from mid to long term yield control, but in both cases this was done with only one adjustment."

On caution

"The Bank of Japan should not adjust its policy toward normalization just on the basis that price growth is showing a slight uptick. It is always worth keeping in mind that there could be a mistake in inflation forecasts, and then the rate would have to switch back to easing again."

On inflation

"The resumption of economic activity in the country after the COVID-19 pandemic and a weak yen could have a big stimulus effect on consumer demand. But given the risks of a global recession, we should view Japan's path to sustainable inflation of 2% as still a long way off."

Most analysts believe that Ueda is not a radical politician. He can by no means be called a hawk. If he decides to make changes, the BOJ's path to normalizing monetary policy will be a slow one.

"A politician like Ueda is good for the Japanese government. He will not force events and roll back the ultra-soft course in a short period of time. Most likely, he will make gradual changes in policy that won't shake the markets too much," Bloomberg analysts say.

In addition, if we believe the Nikkei, Ueda may get a dovish team that will further delay the capitulation of the Japanese central bank. Now candidates Shinichi Uchida and Ryozo Himino are being considered for the post of deputy governor of the BOJ.

The appointment of Uchida would indicate the Japanese government's desire for continuity. This official, like Amamiya, is a key architect in building the country's ultra-soft policies. He also advocates further easing of monetary conditions to ensure economic growth.

Given all the risks, many analysts predict that the Japanese currency could weaken even more against the dollar tomorrow. The most negative forecasts suggest the JPY will fall below the round figure of 134.

Such a scenario looks quite realistic, especially as strong U.S. inflation data could provide a strong support to the asset on Tuesday.

If in January the U.S. inflation grows more than economists' estimates, it will convince investors that the Fed will continue to raise interest rates and keep them high longer than the market expects.

Strengthening hawkish expectations about the Fed's future course could serve as rocket fuel for the dollar and put even more pressure on the yen.