Incoming BOJ chief Ueda to appear in Diet in glimpse of new-look central bank

By Tetsushi Kajimoto and Leika Kihara

TOKYO (Reuters) -Financial markets will get a first glimpse of the new-look Bank of Japan (BOJ) when Kazuo Ueda, the government’s nominee to become its next governor, testifies before parliament next week.

Ueda’s confirmation hearing at the lower house, scheduled for Feb. 24, comes as the central bank’s controversial bond yield control policy faces a renewed attack in the markets, with investors betting on a near-term interest rate hike.

The BOJ on Thursday announced new steps to deter market players from short-selling bonds in another indication of the challenge it faces in maintaining its yield-curve control (YCC) policy.

“The fact the BOJ had to do this is a sign it’s struggling to maintain YCC,” said Naomi Muguruma, senior market economist at Mitsubishi UFJ Morgan Stanley Securities.

Investors will be listening out for hints on how soon the 71-year-old academic may steer the BOJ out its prolonged ultra-loose monetary policy.

Shunichi Yamaguchi, head of the lower house steering committee, told reporters the lower house will conduct the hearing on Ueda’s nomination on Friday morning next week.

The government’s deputy governor nominees – former banking watchdog head Ryozo Himino and Bank of Japan executive Shinichi Uchida – will testify in the afternoon after Ueda, he said.

The government named Ueda to be next BOJ governor on Tuesday in a surprise move.

The markets had expected deputy governor Masayoshi Amamiya to take the helm but saw the choice of Ueda, seen as less dovish than Amamiya, as increasing the chances of an end to YCC.

Japan’s banking lobby head Junichi Hanzawa said he expected the BOJ to exit the ultra-loose policy at some point, which would increase market volatility.

“To reduce such risks, we hope the BOJ, under the new leadership, will make appropriate decisions that ensure markets function healthily through sufficient dialogue such as forward guidance,” Hanzawa, chairman the Japanese Bankers Association, told a news conference on Thursday.

The nominations need the approval of both chambers of the Diet but are effectively a done deal as the ruling coalition holds solid majorities in both.

A steering committee for the upper house failed to set a date for the confirmation hearings there, however, the committee’s chief told reporters on Thursday.

A former BOJ board member, Ueda will succeed incumbent Haruhiko Kuroda, whose second, five-year term ends on April 8.

With inflation exceeding the BOJ’s 2% target, Ueda faces the delicate task of phasing out its yield control policy, which has drawn public criticism for distorting market functions and crushing banks’ margins.

In a column issued last July, Ueda warned against raising rates prematurely but said the BOJ must eventually consider how to exit its ultra-loose policy.

Under yield curve control, the BOJ guides short-term interest rates towards -0.1% and caps the 10-year bond yield at 0.5% as part of efforts to sustainably achieve its 2% inflation target.

(Reporting by Tetsushi Kajimoto and Leika Kihara; Additional reporting by Makiko Yamazaki; Editing by Shri Navaratnam, Bradley Perrett, Barbara Lewis and Hugh Lawson)