Governors of the Bank of Japan tend to be somewhat anonymous figures compared with chairmen of the U.S. Federal Reserve, but they haven’t been invisible. Until now, that is. For the first time in postwar history, the BoJ last month found itself without a governor because of a standoff between the ruling Liberal Democratic Party and the opposition Democratic Party of Japan. And with the yen soaring against the dollar and the economy slowing sharply, Japan’s policymakers feared the absence of leadership would increase the risk of the country stumbling into recession. “In the current subprime credit crisis, it is important to be able to react to risks quickly,” says Economics Minister Hiroko Ota.
The standoff was triggered by the DPJ’s anger that the government rammed its budget, as well as legislation enabling Japan to deploy military vessels in the Indian Ocean, through Parliament. But the deeper issue is how independent monetary policy should be from fiscal policy in the world’s second-largest economy.
The LDP has wielded near-absolute political power in Japan for decades, filling the governor’s post with malleable figures who would not balk at financing big chunks of government debt or allowing the Finance Ministry to maintain a relatively weak yen.
True to form, the LDP early last month nominated a former Finance Ministry fiscal policy chief and deputy BoJ governor, Toshiro Muto, to take over from governor Toshihiko Fukui, whose term expired on March 19. But the DPJ, whose control of the upper house of Parliament gives them veto power, promptly blocked the nomination. They did the same thing when Prime Minister Yasuo Fukuda put forward another former Finance vice minister, Koji Tanami, for the job. After Fukui left office, the government tapped Masaaki Shirakawa, a career central bank bureaucrat who spent the previous two years working as an economics professor at Kyoto University, to serve as temporary governor.
The government and the opposition then settled on Shirakawa, 58, as a permanent compromise; Parliament was expected to approve his nomination earlier this month, just in time for Shirakawa to catch a plane to Washington for the Group of Seven meeting. But the DPJ was still threatening to block the government’s choice for deputy governor, Hiroshi Watanabe, another former Finance Ministry official.
It remains to be seen whether Shirakawa can assert the central bank’s independence and steer monetary policy effectively. Eisuke Sakakibara, who the DPJ had pushed for the governor’s post and who was dubbed “Mr. Yen” for his sway over currency markets as head of international affairs at the Finance Ministry in the late 1990s, says the BoJ has a limited ability to combat Japan’s downturn. The central bank’s policy rate, slashed to zero earlier this decade to fend off deflation and revive growth, stands at just 0.5 percent. “Going back to zero means that you essentially eliminate the central bank from the scene, and that should never be done,” he tells Institutional Investor.
