The Japanese yen and Japanese government bonds are on high alert! The Koizumi cabinet is about to announce the candidates for the central bank committee, could the aggressive easing faction take office?

Japan's Prime Minister Sanae Takaichi's upcoming nominations for new members of the Bank of Japan's Policy Board are becoming a key window for the market to assess her monetary policy intentions. This personnel decision will reveal the extent to which Takaichi hopes to guide the central bank's policies.

According to Bloomberg, citing informed sources, Takaichi may propose replacing two current members—Akira Noguchi and Junko Nakagawa—at the National Diet meeting as early as February 25. Among them, Noguchi's five-year term will end at the end of March, while Nakagawa's term will expire on June 29.

Although these nominations must be approved by both houses of the Diet, and Takaichi's ruling Liberal Democratic Party does not hold a majority in the House of Councillors, adding uncertainty to the personnel process, the market generally believes that her choices will still clearly convey policy signals.

A Bloomberg survey last month showed that 63% of Bank of Japan observers expect that Noguchi's successor will have a distinct reflationary tendency. The core issue lies in the dovishness of the two nominees. Given the current political landscape, it is almost impossible for Takaichi to choose a hawkish individual to succeed. If radical accommodative policymakers successfully take office, the yen exchange rate and the Japanese bond market may face a new round of turbulence.

Personnel Choices Under Market Pressure

If Takaichi simultaneously appoints two reflationists to the Bank of Japan's Policy Board, market anxiety may escalate. Investors are concerned that even though Japan's inflation rate has exceeded the central bank's 2% target for four consecutive years, Takaichi may still attempt to slow the pace of interest rate hikes and further expand fiscal spending to stimulate the economy. If both positions are occupied by strong advocates of monetary easing, it could lead to significant depreciation of the yen and a surge in bond yields.

Former Bank of Japan Policy Board member Seiji Adachi stated in an interview this week:

"If she really wants to stop the yen from weakening or long-term bond yields from rising, it would be best not to choose reflationists."

Takaichi is known for supporting stimulus policies, favoring economic growth, and being cautious about interest rate hikes. The year 2024 is the year before she became Prime Minister, and she has publicly stated that raising interest rates at that time would be "foolish." Since taking office in October last year, she has appointed several reflationists to her economic advisory group, including former Deputy Governor Masayoshi Wakabayashi and Takeshi Kataoka. Both were her mentors and were appointed to the central bank by former Prime Minister Shinzo Abe.

Cautious Remarks After Taking Office

Although the market is highly sensitive to her personnel arrangements, Takaichi has increasingly avoided discussing the details of monetary policy since taking office. According to Bank of Japan Governor Kazuo Ueda, during a one-on-one meeting at the Prime Minister's official residence on Monday, Takaichi did not make any specific policy requests.

In terms of fiscal policy, the Prime Minister's statements in recent weeks have also become more cautious. Previously, her commitment to temporarily suspend the food consumption tax had caused turmoil in the bond market in late January, after which she has moderated her related remarks.

Takaichi's electoral victory has provided her administration with stronger backing. The Liberal Democratic Party she leads secured more than two-thirds of the seats in the House of Representatives, solidifying a government that previously operated with only a slim majority. This significant victory, combined with cautious remarks after the election, has effectively reassured market participants At the press conference the day after the election victory on February 9, she emphasized that her active fiscal policy will be "responsible," and clearly stated that any reduction in consumption tax will not be financed through additional debt issuance. This statement aims to alleviate market concerns about lax fiscal discipline.

Committee Composition or Maintaining Balance

Some observers of the Bank of Japan believe that even if Kazuo Ueda chooses a strong advocate of monetary easing to replace Asahi Noguchi, the overall pattern of the policy committee will be limited. Asahi Noguchi was already a scholar inclined towards stimulus policies, having voted against interest rate hikes twice; replacing one dove with another dove will not change the existing balance of power.

In contrast, the successor to Junko Nakagawa is of greater concern. As a former executive at Nomura Holdings, Junko Nakagawa generally adhered to the committee consensus, having voted in favor of all interest rate hike decisions since the Bank of Japan exited its large-scale stimulus experiment in March 2024. If a re-inflationist were to take her position, the tilt of the policy balance would be more pronounced.

Personnel appointments are expected to maintain the existing gender balance, that is, a combination of one man and one woman. This also continues the progress made last year when the committee first had two female members, achieving gender equality.

Kazuo Ueda's victory opens up greater space for his long-term policy layout. By the spring of 2028, the terms of Bank of Japan Governor Kazuo Ueda and Deputy Governor will expire simultaneously, and if Kazuo Ueda is still in office, he will have the opportunity to lead a new round of core personnel appointments, further shaping the future direction of the central bank