Weighing up Ueda, investors cool on hawkish BOJ bets
FILE PHOTO: A man wearing a protective mask walks past the headquarters of Bank of Japan in Tokyo, Japan, May 22, 2020. REUTERS/Kim Kyung-Hoon
By Tom Westbrook and Kevin Buckland
SINGAPORE/TOKYO (Reuters) — As surprise gives way to scrutiny of the men set to lead Japan’s central bank for the next five years, investors are dialling back bets on swift shifts away from super-easy policy settings.
Japan is likely to appoint economist and former policy board member Kazuo Ueda, as the next governor of the Bank of Japan, officials with knowledge of the matter have told Reuters, with former banking regulator Ryozo Himino and BOJ executive Shinichi Uchida as deputy governors.
The news was initially met with yen buying, short-selling in the bond market and pressure on stocks as traders reckoned the choice of a candidate nobody thought likely, with two new deputies, was a signal to expect change and fresh thinking.
With inflation accelerating, Ueda could finally set Japan on a path to raise rates after the BOJ spent a decade fighting deflation risks with its unorthodox bond buying scheme costing trillions of yen.
But the reality of high costs for shorting bonds and poor returns on a low-yielding currency such as the yen while uncertainty swirls over Ueda’s intentions and timeline — took the heat out of a trade that was running white-hot a month ago.
«There are no strong convictions at the moment,» said Tareck Horchani, head of prime brokerage dealing at Maybank Securities in Singapore.
«Just fast money doing tactical trades, but without any clear strong view following the announcement,» he said, such as short-term options contracts betting the yen weakens. Ueda himself on Friday said current policy settings were appropriate, which also put a bit of a dampener on expectations of any shift.
The yen, which climbed as far as 129.80 per dollar, was back to 132.16 to the dollar by Monday while bonds and bond futures were bouncing, especially at longer tenors.
Implied volatility has also eased in the forex options market, suggesting an ebbing in bets on big shifts in the yen exchange rate. [JP/]
«The initial read of the market was probably that this is a hawkish development and that doesn’t appear to be justified,» said Shafali Sachdev, head of fixed income, currencies and commodities for Asia at BNP Paribas (OTC:BNPQY) Wealth Management.
«It’s not very apparent that (Ueda) would take on the job and then immediately change the policy.»
Japan’s government is expected to formally nominate Ueda for the job on Tuesday.
HARD TO MANAGE
While traders scramble for detail on Ueda’s background and thinking, a changing of the guard at the BOJ comes at a pivotal moment for monetary policy and investment in Japan.
Inflation is finally arriving after decades spent delving deeper and deeper into experimental ways of loosening rates.
A surprise tweak to the BOJ’s limit on 10-year yields led foreigners to rush into short positions in Japanese government bonds in anticipation that more changes could follow quickly.
The surprise choice of Ueda makes navigating that process a bit more tricky, especially while current policy settings are making it expensive to keep short positions open.
«Shorting JGBs was always going to be the hardest trade to manage this year,» said James Malcolm, head of FX strategy at UBS in London. He expects shorts can profit, «but it’s probably going to be a rather uncomfortable ride,» he added.
To be sure, 10-year Japanese yields were untraded at the BOJ’s ceiling on Monday, indicating plenty of investors are staying short. But analysts say they are going to need to hold on for a while now.
«Even if the new governor sends a dovish message, they may not take off their short positions,» said Naka Matsuzawa, chief strategist at Nomura in Tokyo. «But it’s not going to happen in the first few meetings.»
Those who know Ueda also say he’s not the sort to rush.
«Ueda is the teacher of everybody who is anybody here in Japanese finance,» said Jesper Koll, expert director at financial services firm Monex in Tokyo, who came into contact with him while working at J.P. Morgan and Merrill Lynch.
«I can guarantee you that he’s not interested in — and he’s under no pressure to provide — quick wins, in any fashion.»