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Monday, March 24, 2003

JAPANESE PERSPECTIVES

Will new BOJ governor be able to navigate tricky global waters?


Fukui Toshihiko was officially sworn in as new governor of the Bank of Japan on Thursday, with former Vice Finance Minister Toshiro Muto and Kazumasa Iwata, a senior Cabinet official, appointed as vice governors. Under the revised BOJ Law of 1998, all members of the BOJ Policy Board are to serve a five-year tenure. It is Fukui, Muto and Iwata, plus the six other members currently on the board, who will be responsible for steering the nation's monetary policy in the coming years.

Expectations are high for deflation-fighting measures as economic conditions remain severe. However, it would be unrealistic to think that the inauguration of a new BOJ team will lead to dramatic changes. Consumer prices are on a downward trend worldwide, and China, which continues to enjoy rapid economic growth, is no exception.

Although calls are mounting for the central bank to do something to stop the decline in share prices as well, a slumping stock market is not a problem unique to Japan. On the contrary, key stock price indexes have fallen by about 25 percent in both Japan and the United States over the past year, whereas the margin of decline in Germany has been 50 percent, showing the drop occurred much faster in Europe.

Not much can be done by the Japanese central bank alone to reverse the situation. As the new governor himself put it: "There is no magic stick" for dealing with these problems.

What is unique in Japan, however, is that it's simultaneously facing a price slump in both goods and assets -- the lingering effect of the collapse of the late 1980s bubble economy. The new governor must be aware that the BOJ at that time failed to act promptly to restrain asset inflation, despite having fully recognized the risks.

I do not intend to repeat criticism of the central bank at this point, but we should keep in mind that the current slump in asset prices is just the bubble economy's skyrocketing of real estate and share prices in reverse. Both land and stock prices have dropped to about one-fifth of what their peaks were during the bubble, but this only shows that prices have returned to what they were before it began.

In an increasingly globalized economy, Japanese wages and land prices, despite their recent declines, remain higher than in other major countries, if measured by productivity. This is proven by the fact that the traditional wage structure is being reviewed as part of the annual labor negotiations this spring. It is rather strange that few people are calling for cuts in public-sector wages, especially salaries for Diet members and Cabinet ministers. Government leaders should realize that our prices are not too low, but too high, as they formulate the nation's economic policies.

Another key task for the new governor will be to maintain the BOJ's independence and transparency in policymaking, as stipulated in the revised BOJ Law. Two major reasons why the nation's cost structure is so high are the plethora of government regulations and die-hard vested interests. Since there is not much room for fiscal stimulus amid the government's mounting debt, those keen on preserving their vested interests tend to look to the BOJ for solutions to all sorts of problems. In order to lobby for additional government spending, they'll have to discuss those fiscal woes in the Diet. But they can circumvent that process by calling for action by the BOJ, which has the power to print new money. To ensure its independence, the BOJ will have to draw a clear line between monetary and fiscal policy.

It is also essential to ensure transparency in the policymaking process. This is particularly important because the BOJ leadership includes Mr. Muto, who is keenly aware of the government's debt woes, and Mr. Iwata, known as an advocate of inflation-targeting. The decision-making process at the BOJ, including how each of the Policy Board members votes on each matter, must be disclosed to the public.

The worldwide trend in declining prices is being determined by various factors that cannot be changed by monetary policy alone. This must be kept in mind by the central bank as it tries to deal with the trend from a global perspective. A number of commentaries on Japan appearing in overseas media often, and irresponsibly, fail to grasp the facts regarding this nation's economy. I hope that the BOJ, without fearing short-term criticism, will carry out its duty and steadfastly implement any steps that are necessary.

Mr. Fukui has a five-year tenure, which will likely make it difficult for him as the global economic framework changes and geopolitical factors remain unstable. Of course, he will need to be flexible, but he also must not lose sight of his present course and destination. His job is to clearly explain the BOJ's policies based on those coordinates and try to win the understanding of the public and the international community.

Teruhiko Mano is an adviser to Tokyo Research International Ltd.


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