(Bloomberg) -- Investors are readying for the final stretch in the race to replace Bank of Japan Governor Haruhiko Kuroda, a decision that could whipsaw markets from the yen to Treasuries.

With a nomination anticipated in early February and a history of press leaks before the official announcement, traders are weighing the perceived policy bias of the main contenders and positioning their books accordingly. Picking current Deputy Governor Masayoshi Amamiya may lead to yen weakness, while giving the nod to his predecessor Hiroshi Nakaso would likely have the opposite effect, according to market participants.

A surprise candidate like Hirohide Yamaguchi could turbo-charge bets on a quicker end to the BOJ’s ultra-easy policy and result in higher bond yields worldwide. 

Unusually close attention is being paid to the nomination after the BOJ sent shockwaves through global markets in December by tweaking yield-curve control and moved many securities again in January by standing pat. 

Here’s a look at the expected reaction to some of the candidates who were profiled in detail here: 

BOJ Veterans Remain Best Picks for Post-Kuroda as Decision Looms

Masayoshi Amamiya 

Amamiya is seen as the favorite to take over from Kuroda, with some market participants ascribing about a 40%-50% chance of a nomination. Perhaps unfairly seen as a continuity candidate who could extend Kuroda’s ultra-easy policy, the yen would likely slump and Japanese stocks surge in a knee-jerk reaction, given traders have positioned for a change. 

Dollar-yen could jump 250 pips on Amamiya’s nomination, according to Brent Donnelly of Spectra FX Solutions in a note last month.

“The initial reaction for markets for Amamiya will be a risk-on rally” until guidance comes from the government on the monetary policy outlook, said Shoki Omori, chief desk strategist at Mizuho Securities in Tokyo. “Markets will initially price in a longer negative interest rate policy and yield-curve control and not think about politics.” 

Hiroshi Nakaso 

As Nakaso is considered slightly more hawkish than Amamiya, volatility in stocks and bonds will likely be more subdued as traders are already anticipating that a change in governor comes with a shift in BOJ stance. 

Still, dollar-yen may slide 200 pips should he be nominated, on bets the BOJ could abandon its targeting of the 10-year yield, according to Spectra’s Donnelly. Nakaso recently published a playbook that detailed an exit from loose policy, he said.

“Since his original career has been focused on the financial system and other areas, the market may speculate that he is likely to focus on the side effects of negative interest rates and the YCC,” said Yujiro Goto, head of foreign-exchange strategy at Nomura Holdings Inc. “The fact that he has been away from the BOJ for about five years makes it easier for him to change the policy.” 

On Thursday, Nakaso said he will take on an expanded advisory role for APEC, a comment that raised questions over the likelihood of his taking the helm.

Hirohide Yamaguchi 

Picking Yamaguchi, the biggest hawk among the leading candidates, would send the strongest signal the government is seeking a clear policy shift and trigger the most market volatility. The yen could strengthen toward 127 per dollar, according to Citigroup Inc. strategist Osamu Takashima, while Japanese stocks may drop as much as 1% and foreigners would be “fired up” to test the BOJ’s yield ceiling, Mizuho’s Omori said.

“If he is selected, it will create the image that the BOJ has taken the helm toward the normalization of monetary policy,” said Eiji Dohke, chief bond strategist at SBI Securities Co. in Tokyo. “If Yamaguchi becomes governor, the yield curve will probably shift upward in general.”

The effects would be felt further afield given the potential for a wave of Japanese outflows from foreign assets to take advantage of higher yields at home. That could have a negative impact on Australian and US government debt given that Japanese investors own about 3% and 4.5% of those markets respectively, according to Commonwealth Bank of Australia economists Stephen Halmarick and Joseph Capurso. 

The BOJ’s shock December decision to double its ceiling for 10-year yields illustrated the shockwaves that any hint of policy change can trigger, both at home and abroad. The move sent the yen and Japanese yields soaring, Treasuries lower and touched everything from US equity futures to the Australian dollar and gold.

So What If the Bank of Japan Exits Curve Control?: Macro Models


There’s little risk an outside candidate like Takatoshi Ito, Masatsugu Asakawa and Yuri Okina are selected to replace Kuroda, according to strategists. Ito is too much of an academic and Asakawa has had a career too similar to that of Kuroda, said Nomura’s Goto.

“There is a possibility that a woman such as Yuri Okina will do something to enhance the image of the administration, but my impression is that Ito, Asakawa, and Okina are more correct candidates for deputy governors rather than governors,” Goto said. 

--With assistance from Issei Hazama, Hiroko Komiya, Masahiro Hidaka, Saburo Funabiki, Toru Fujioka and Sanjit Das.

(Updates with Nakaso comment Thursday)

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