The yen and bonds are on high alert! The Kao government is about to announce the candidates for the central bank committee members, will the radical easing faction take over?

Japanese Prime Minister Taro Kono's upcoming nomination of new candidates for the Bank of Japan's Policy Board is becoming a key window for the market to assess its monetary policy intentions. This personnel decision will reveal to what extent Taro Kono hopes to guide the direction of the central bank's policy. According to Bloomberg, informed sources say Taro Kono may propose replacing two current members at a parliamentary meeting on February 25Toshihiko Nakagawa and Junko Nakagawa. Nakagawa's five-year term will end at the end of March, while Nakagawa's term will expire on June 29. Although these nominations require approval from both houses of parliament, and Taro Kono's ruling Liberal Democratic Party does not have a majority in the Upper House, adding uncertainty to the personnel process, the market generally believes that the choices themselves will still convey clear policy signals. A survey by Bloomberg last month showed that 63% of observers of the Bank of Japan expect Nakagawa's successor to have a distinct reflation bias. The core issue lies in the dovishness of the two nominated individuals. Given the current political landscape, it is almost impossible for Taro Kono to choose a hawkish individual as a successor. If radical doves are successful in assuming office, the yen exchange rate and the Japanese government bond market may experience a new round of volatility. Personnel choices face market pressure If Taro Kono appoints two reflationists to the Bank of Japan's Policy Board at the same time, market anxiety may escalate. Investors are concerned that even though Japanese inflation has exceeded the central bank's 2% target for four consecutive years, Taro Kono may still try to slow down the pace of rate hikes and further expand fiscal spending to stimulate the economy. If both positions are held by staunch advocates of monetary easing, the yen could depreciate significantly and bond yields could jump. Former Bank of Japan Policy Board member Masaaki Shirakawa said in an interview earlier this week: "If she really wants to prevent the yen from weakening or long-term bond yields from rising, it would be best not to choose reflationists." Taro Kono is known for her support of stimulus policies and her cautious approach to rate hikes. In 2024, the year before she became prime minister, she openly stated that raising interest rates at that time would be "foolish." Since taking office in October last year, she has appointed several reflationists to the economic advisory group, including former deputy governor Masazumi Wakatabe and Hiroshi Okamoto. Both of these individuals were her mentors and were appointed as Bank of Japan Board...