The latest gossip out of Japan is that Haruhiko Kuroda is the front-runner for the BoJ. Mr. Kuroda is presently president of the Asian Development Bank. He has apparently advocated an inflation target for a decade and has recently said that there is room for more easing in 2013. A complication is that he has worked at the finance ministry, and opposition parties have said that they do not want a finance-ministry insider for the post, for fear that he would fall in with the existing consensus. The government does not have a majority in the upper house so will need support from some opposition lawmakers for the appointment.
The gossip also suggests Kikuo Iwata, a pro-QE academic, and Hiroshi Nakaso, a BoJ official, for the other two appointments.
I do not see anything here to suggest that the fundamental picture has changed. If anything, the opposition might oppose the government’s candidates for not being pro-stimulus enough. The political consensus is still very much in favour of robust monetary action.
Bloomberg reports that Zhou Xiaochuan is to stay on at the PBOC, in spite of having missed out on an important post in the latest round of Chinese governmental shuffling. Analysts appear to be divided on the reason for this, with some arguing that Zhou’s skills will be needed (especially to deal with bad loans in the banking system) by the new rulers, while others argue that his possible reappointment suggests that no other candidate could be agreed upon, and that Zhou will be a lame duck.
In any case, I find it hard to see any implications in any of this. Chinese Kremlinology (Zhongnanology?) is not something I know much about. I have read about the bureaucratic battles of the Ministry of Finance and PBOC in previous rounds of bank restructuring and de/re-regulation in Red Capitalism, but that book reads like an extended investment-bank research note and does not tell a clear story, so I do not feel I have a good grasp of what might be going on behind closed doors at present. I have a new book on the Chinese economy to start this week.
The Democratic governor of Hawaii has actually given voice to my thesis of last week, saying that the sequester will happen and there will be a reaction in the country that will cause, “at a minimum”, immediate relief from the sequester. I thought that this could well be Mr. Obama’s strategy for dealing with the automatic nature of the sequester: let it happen, and heap ignominy on the Republicans. The governor’s comments support my thesis.
On a separate by related question, Messrs. Boehner and Reid are apparently discussing a Republican proposal on the continuing resolution (which avoids a government shutdown and needs to be renewed by 27th March) that would extend spending levels at their post-sequester levels and give the Pentagon some room for manoeuvre (in a manner that I have not seen specified) on its spending cuts. The Wall Street Journal reports an argument that this would be difficult for the Democrats to oppose, as they could be painted as forcing a government shutdown in order to reverse sequester cuts that had already happened. That is probably right, which means that, if the Democrats are going to have a big fight, it needs to be over the sequester.
On that note, it seems to me that the Democratic strategy could cause a political firestorm. If the idea is indeed to whip up such a panic that the Republicans are forced into a retreat over the sequester after it has happened, then that means that Mr. Obama has chosen today to draw a line in the sand against Republican fiscal blackmail. If the battle does create a lot of noise, markets are unlikely to understand what is going on. The media coverage could be all about the economic damage that the sequester will cause, and that could spook investors.