For Japanese Prime Minister Fumio Kishida, his country's next central bank chief had to symbolise a departure from the unconventional policies of his predecessor Shinzo Abe — but without angering pro-growth politicians of Mr Abe's powerful political faction.
The tricky task of steering the Bank of Japan (BOJ) out of years of ultra-low interest rates without up-ending markets required the skill to read markets and clearly communicate policy intentions, both domestically and internationally.
Kazuo Ueda, a 71-year-old university professor who has kept a low profile despite strong credentials as a monetary policy expert, ticked some important boxes.
He was branded neither an explicit dove nor hawk. While he was not even on the list of dark-horse candidates floated by the media, Mr Ueda was well known in global central bank circles.
Having an academic helm the BOJ is unprecedented in Japan, where the job traditionally rotates between a central banker and an official from the Ministry of Finance (MOF).
But the idea found traction in Mr Kishida's administration, particularly as attempts to convince incumbent deputy governor Masayoshi Amamiya, considered the top contender for the job, failed.
The account of how Mr Kishida chose the new BOJ leadership is based on interviews and conversations with 15 sources, including former and incumbent central bank and government officials, ruling camp politicians, aides of Mr Kishida, private-sector bankers and analysts closely watching Japanese politics and policy.
Most of them spoke on condition of anonymity as they were not authorised to speak publicly, or declined to comment on record due to the sensitivity of the matter.
The search for a new chief began mid-last year, when Mr Kishida and his aides drafted a list including a range of candidates from the BOJ, MOF, private sector and academia.
Other academics in the list included Columbia University professor Takatoshi Ito, a close associate of outgoing BOJ governor Haruhiko Kuroda, and University of Tokyo academic Tsutomu Watanabe, known for his research on Japan's deflation.
The BOJ lobbied hard for a career central banker to take the job after Mr Kuroda, a former MOF executive, presided for a rare second, five-year term that ends in April.
The bank's preferred choices were incumbent deputy governor Mr Amamiya, as well as former deputies Hiroshi Nakaso and Hirohide Yamaguchi, given their deep knowledge on monetary policy.
Many finance ministry officials favoured Mr Amamiya, who for decades has cultivated good ties with the government.
But Mr Amamiya had made clear to associates from the outset he had no intention of taking the job, on the view he would not be able to dismantle the stimulus he helped Mr Kuroda create, sources say.
"If he becomes governor, he would have had to spend five years contradicting what he said in the past decade," said a former MOF executive who knows Mr Amamiya well. "That's quite hard."
A commercial bank executive who met him late last year recalled how Mr Amamiya, when asked, flatly denied the chance of becoming governor. "It struck me how he very strongly ruled out the possibility," the executive said.
Mr Amamiya, in fact, talked about how the BOJ needed to be like the US Federal Reserve, where academics with monetary policy expertise take the helm and guide policy with support from staff, said people who had interactions with him.
Mr Kishida's administration also wanted someone who would signal a departure from Mr Kuroda's monetary experiment that was a key part of his predecessor's "Abenomics" stimulus policies, and became deeply unpopular with the public for failing to broadly distribute wealth.
But choosing a more hawkish policymaker like Mr Nakaso or Mr Yamaguchi would have drawn discontent from reflationist-minded politicians from Mr Abe's powerful faction within the ruling Liberal Democratic Party (LDP).
That was too risky for Mr Kishida, whose own faction is a minority and relies on support from more powerful groups within the LDP.
The choice of Mr Kuroda's successor has been closely watched by investors and the wider public as an indication of how soon the BOJ will shift away from extremely low interest rates, a transition that could have huge ramifications for global financial markets.
"The prime minister probably wants a fresh face. But he also needs to avoid giving the impression that there will be a big change to ultra-loose policy," ruling party heavyweight Akira Amari told Reuters days before news of Mr Ueda's choice broke.
When asked in parliament on Wednesday by an opposition politician, Mr Kishida said he could not say how he reached the decision and when he finalised it. He also declined to comment on whether the administration sounded out Mr Amamiya for the job.
Mr Kishida, however, said he had "exchanged views" with many people since last year while selecting the new BOJ leadership.
The BOJ declined to comment for this story, including on questions about Mr Amamiya's consideration of the role. Japan's top government spokesperson, Hirokazu Matsuno, declined to comment when asked on Thursday whether the government sounded out Mr Amamiya for the top BOJ job.
Mr Matsuno said he hoped the BOJ worked closely with the government and guided monetary policy flexibly, when asked whether Mr Ueda's appointment could lead to a retreat from Mr Abenomics.
Political balancing act
Thanks in part to Mr Amamiya's recommendation, Mr Ueda remained on a shortlist and eventually became the top choice in a process that was disclosed to only a handful of people.
On February 8, Mr Kishida met party heavyweights Toshimitsu Motegi and Taro Aso for dinner at a high-end Japanese restaurant near the premier's official Tokyo residence.
While Mr Kishida did not reveal the name of his preferred choice, the BOJ succession was among topics discussed, according to two sources with knowledge of the matter.
"The government needed someone who understood monetary policy both in terms of practice and theory, and can interact with an inner circle of top central bankers," one of the people said. "That turned out to be Mr Ueda."
The fact Mr Ueda, who holds a PhD from the Massachusetts Institute of Technology and studied under prominent central banker Stanley Fischer, kept a low political profile and avoided being branded as someone in favour or against Abenomics, served him well.
While he warned of the rising cost of the BOJ's yield-control policy, Mr Ueda has call for monetary policy to remain loose to ensure Japan stably achieves the bank's 2 per cent inflation target.
The view meshes with that of Mr Kishida's administration, which wants the BOJ to address the side-effects of yield curve control but not rush into tightening monetary policy.
"Amamiya was labelled as close to Abenomics. By contrast, Ueda has a fresh image and gives the BOJ a freer hand in shifting away from Abenomics," said a ruling party heavyweight belonging to Mr Abe's faction.
Political commentator Atsuo Ito sees Mr Kishida's decision as symbolic of the way his administration gives due consideration to what politicians in Mr Abe's pro-growth faction think.
"For Kishida, this choice was about getting the political balance right," he said.
New power dynamics
Mr Kishida's choice was welcomed by many BOJ policymakers, as Mr Ueda was no stranger to the institution and a quiet cheerleader of its pre-Kuroda conventional policies.
During his seven-year stint as a BOJ board member, Mr Ueda worked closely with Mr Amamiya inventing new tools to combat a banking crisis and debilitating deflation.
Even after retiring as board member, Mr Ueda kept close ties with the BOJ by serving as an adviser at its think tank and attending various international central bank forums.
"He's something of a legend in Japanese central banking," said a BOJ official of Mr Ueda. "He stood out as someone special among the many members who served at its board."
Knowing they would have little influence on Mr Kishida's final pick, BOJ officials had a backup plan in case the new governor was someone from outside the institution.
That plan was to reappoint BOJ executive director Shinichi Uchida for a rare, second four-year term in April last year to ensure he would slide into the deputy governor post.
That would provide the new leadership with the kind of knowledge of the BOJ's inner bureaucracy for which Mr Amamiya was known.
Together with Ryozo Himino, the other nominated deputy and a former banking regulator, the three should have the right combination of theoretical, industry and technocratic expertise to unwind Kuroda-era policy, sources familiar with the BOJ's thinking said.
However, none of the three are seen as having the political savviness of Mr Amamiya, who could read the political mood and work behind the scenes to sound out the administration's policy views.
That could work as a disadvantage if the economy takes a turn for the worse and the BOJ again comes under political heat.
Already, Japan faces headwinds from slowing global growth, casting doubt on whether wages will rise enough to keep inflation sustainably around the BOJ's 2 per cent target and justify phasing out stimulus.
"If the BOJ actually moves toward normalising monetary policy, there will surely be some political tension because the reflationist-minded lawmakers will push back," Atsuo Ito said.
"A policy reversal will probably take quite a long time."
Reuters
