Leadership recast looms at North Asian central banks

Central bank heads could be replaced in China, Taiwan, Korea, and Japan in the coming three months. Whether the incumbents stay or not, all four face important policy challenges.
Leadership recast looms at North Asian central banks

A quartet of North Asian central banks could see changes at the top in the next few months, creating the potential for some policy uncertainty in the region at a time when financial markets are turning more jumpy.

Bankers, asset managers, and economists contacted by AsianInvestor said they do not expect any radical policy changes but highlighted the challenges that would face incoming central bankers.

Perng Fai-nan, governor of Taiwan’s Central Bank of the Republic of China (CBC), Lee Ju-yeol, governor of the Bank of Korea (BOK), and Haruhiko Kuroda, governor of the Bank of Japan (BOJ), have either decided to retire or will see their terms end between February and April this year. Perng’s February replacement, Yang Chin-long, has already been announced, but Lee and Kuroda still have to wait and see if they will retain their positions.

What's more, Zhou Xiaochuan, governor of the People’s Bank of China (PBOC) since December 2002, could be on his way out. Zhou alluded to his retirement last October during the 19th National Congress, and his exclusion from the 13th National Committee of the Chinese People’s Political Consultative Conference (CPPCC), where he has served as vice chairman since 2013, hints at his retirement by early March. The CPPCC is scheduled to meet in Beijing on March 3.

In the paragraphs below we run through the challenges facing each of the four central banks and relay what bankers and economists are expecting in this transition year.


Zhou, the longest serving governor in PBOC history, is expected to retire soon and his replacement is anyone’s guess.

Candidates for the job include Guo Shuqing, the current chairman of the China Banking Regulatory Commission (CBRC), Jiang Chaoliang, current Communist Party Secretary of Hubei province, and Yi Gang, deputy governor of the PBOC, according to Tuan Huynh, chief investment officer of Deutsche Bank Wealth Management.

However, given the Communist Party’s control over the PBOC and the increasing centralisation of power under President Xi Jinping, it may not matter who the successor turns out to be.

“Under the new presidency and centralised economic power in China, we do not expect a stronger man than Xiaochuan will be appointed. Instead, we believe that the new PBOC will only play an even more limited role in the monetary-policy decision making,” Alicia Garcia-Herrero, chief economist for the Asian-Pacific region at French investment bank Natixis, told AsianInvestor.

Jean-Charles Sambor, deputy head of emerging markets fixed income at BNP Paribas Asset Management(BNP AM), doesn’t expect any massive change in monetary policy, especially in the area of reducing debt. “It will be a very gradual deleveraging process, so I don’t think that they will hike rates aggressively,” he said.

It's a view shared by Commerzbank’s Zhou Hao, a senior emerging markets economist for Asia. He doesn’t expect to see any Chinese interest rate hike in 2018, given that the rate is already quite high. The base interest rate has remained at 4.35% since October 2015.

In terms of the domestic bond market, Sambor is optimistic that Chinese government bond prices will rise. “I don’t think we’ll see any spike in the five-year or 10-year yields, so in our opinion we should see 3.5% by the end of the year, which would be quite a positive outcome,” he said. Bond yields move inversely to bond prices.

Ten-year Chinese government bond yields were around 3.8% as of February 6, according to PBOC data.

The relatively higher yields available on Chinese onshore government bonds are attractive to overseas investors, who held Rmb1.1 trillion-worth ($175 billion) as of September 2017, up 27% year on year, according to a January 2018 UBS report.

The key challenge for the incoming PBOC governor is how to balance pursuing reforms that improve the quality of growth, such as deleveraging, without stalling China’s economy, Paul Hsiao, Asia economist at PineBridge Investments, told AsianInvestor.

“They have to focus on a gradual deleveraging without creating any systemic risk,” BNP’s Sambor agreed.


Kuroda is widely expected to stick around for another term as head of the BOJ when his current term expires in April.

“His policy stance is tied closely to that of Prime Minister [Shinzo] Abe’s and Governor Kuroda has given no hints of stepping down,” Pinebridge’s Hsiao said.

Other financial industry experts agree, pointing out that the current governor is highly trusted by Abe. “Kuroda is arguably a figurehead of Abenomics, after launching the Quantitative and Qualitative Monetary Easing and the Yield Curve Control [policies], which succeeded to weaken the yen and to lift the equity market,” Natixis’s Garcia-Herrero said.

Garcia-Herrero expects the BOJ to continue with its expansionary monetary policy for the foreseeable future.

However, better-than-expected economic growth in Japan over the past year and increasing signs of inflation should lead to monetary policy being gradually normalised in the medium-term, Hsiao said, given how long Japanese interest rates have been around the zero mark and, more recently, negative.

Japan’s consumer price inflation hit 1% in December 2017, the highest level since March 2015, according to OECD data.

This policy normalisation will most likely take the form of shifting Japan’s Yield Curve Control up  slightly through higher short-term and long-term policy rates, Hsiao said. “Any formal announcement of a reduction in [the central bank's] annual asset purchase programme should have a limited impact on domestic bond markets, since the Bank of Japan has been quietly undershooting its target for a while now,” he said.

The BOJ kept Japan’s interest rate at -0.1% at its last policy meeting in January, as it has done for the last two years. 

Despite the slight inflationary trend, Commerzbank’s Zhou believes low inflation will remain a pressing concern for the central bank after decades of deflation.

“What can the BOJ do? If they signal any kind of withdrawal of the easing monetary policy, the Japanese yen will appreciate a lot and that will make the inflation target even more difficult to achieve,” he told AsianInvestor. “I don’t think the next governor will have the guts to signal this kind of thing to the market."


Whether the BOK’s Lee will take a second term this March or make way for a new governor remains to be seen.

The key issue for Lee’s successor, if there is one, is how to raise interest rates in Korea without affecting the domestic recovery, Huynh said. 

That  includes calibrating monetary policy amid high household debt levels. “The debt is so high that if the interest is too high, the debt problem will be even worse,” Commerzbank’s Zhou said.

Household debt in Korea rose to record highs in the second quarter of 2017, hitting 93.8% of GDP, up from 90% of GDP in the first quarter, according to online data provider Trading Economics.

“Rapidly rising long-term rates will worsen the debt service of households, hurting consumption and the soundness of the financial system,” Natixis’s Garcia-Herrero agreed. “Hence, the room to hike is rather limited for the BOK.”

Inflation is also a concern for the Korean central bank, as a slight deflationary trend over the last few months may discourage further rate hikes after the BOK raised its main policy rate for the first time in six years to 1.50% in November.

“The BOK is unlikely to continue raising rates until inflation is back closer to their target of 2%,” Paul Hsiao, Asia economist at PineBridge Investments, told AsianInvestor.

Korean inflation has slowed to the mid-1% level recently and is expected to stay around the lower band of the central bank's inflation target, said Garcia-Herrero, adding that she doesn’t expect it to approach the upper end of the 2% target until the second half of 2018.

As a result, she expects the BOK to hold rates at 1.5% in the first half of 2018, before raising rates by 25 basis points in the second half of the year.

BNP AM’s Sambor sees Korean inflation picking up later in 2018 as well, but he expects the BOK to raise rates twice in the second half of the year. As a result, he expects domestic Korean bond yields to increase both at the short and long ends of the curve, albeit with a little steepening too.

“We think that there are increasing signs that some domestic institutional investors are willing to buy more overseas bonds because local yields are way too low, and if they do that they will have to sell some of their local Korean treasury bond holdings on the long end of the curve,” he explained.

The 10-year Korean government bond yield was around 2.8% on February 6, according to the Asian Development Bank.


Perng, the long-time governor of the CBC, is set to retire at the end of February after 20 years at the helm. Yang, the incoming governor, has held senior positions within the CBC since July 1989, including deputy governor since March 2008, and his length of service at the central bank should keep policies relatively stable, experts said.

“Yang Chin-long has been serving as CBC’s top deputy since 2008,” Deutsche's Huynh said. “Therefore the leadership transition will be smooth and it is unlikely to see dramatic changes in CBC’s monetary policy.”

However, there is some uncertainty over expected rate hikes. The CBC has not moved the benchmark Taiwanese interest rate since setting it at 1.375% in July 2016.

“In 2018, we think they are likely to hike once or twice,” Sambor at BNP Paribas said. Taiwan has a strong balance of payments and inflation is under control, he told AsianInvestor, but the central bank  will likely raise rates in order to track the Federal Reserve, which raised US interest rates three times last year and is widely expected do so again this year.

It's not a given, though. Taiwan's persistent negative output gap, where actual economic growth is below potential growth, plus mild inflation may yet deter the CBC from acting, Garcia-Herrero said.

“Yang has to make a decision on the policy rate when investment in Taiwan is still weak and the rest of the world has started to tighten monetary policy,” she told AsianInvestor. “We do not expect the CBC to raise rates this year.”

Taiwan's consumer price index grew by 0.62% in 2017, according to government database National Statistics, picking up to 0.88% in January 2018. Fourth quarter GDP growth in 2017 is estimated at 3.28%, the highest rate of growth since the first quarter of 2015.

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