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Saturday, Feb. 2, 2008

No sure bets on next BOJ chief

Ex-bureaucrat Muto has edge but politics may delay picks


Staff writer

Bank of Japan Gov. Toshihiko Fukui's voice became slightly tense as he answered questions from reporters at a news conference last month about the upcoming appointments of his successor and two new deputy governors.

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Toshihiko Fukui Toshiro Muto

Fukui was apparently irritated that the selection of new BOJ chief to take over when his own term expires next month had become a subject of political tug of war between the ruling bloc and the opposition camp.

"This is an era when we need to exchange opinions with people in many fields on the domestic and global economies over various market issues," Fukui said Jan. 22, adding it would be unbelievable if top positions at the central bank remained vacant on such occasions.

"I have strong confidence that the government and the Diet will appoint a suitable person based on good sense," said Fukui, whose term ends March 19.

Fukui was referring to media speculation that the positions of BOJ governor and two deputy governors might be vacant for a brief period after he leaves if the Democratic Party of Japan, the largest opposition force, turns down the candidates selected by the government and Liberal Democratic Party-New Komeito ruling bloc. The new BOJ chief must be approved by both Diet chambers, and the opposition controls the Upper House.

But his concern may prove unwarranted. Recent reports suggest the DPJ would be willing to back BOJ Vice Gov. Toshiro Muto — the ruling coalition's leading candidate to succeed Fukui.

But Kenji Yamaoka, the DPJ's Diet affairs chief, said Friday the party hadn't given any thought to a successor and would think about it only after a specific name is proposed.

"We don't have any position on who's good or bad at this point. No discussions have been held on the issue among DPJ executives," he told reporters.

The appointment of high-ranking executives at government committees and public corporations, including the central bank and NHK, must be approved by the Diet.

Unlike bills, however, the matter cannot be rammed through the Diet by the Lower House if it has been rejected by the Upper House. In that case, the government will have to select different candidates and appeal for Diet endorsement all over again.

The Finance Ministry maintained a strong influence on the central bank's decision-making process until 1998, when the revised BOJ law kicked in and gave the central bank more independence. In fact, Finance Ministry bureaucrats and BOJ executives even took turns holding the BOJ governorship.

Muto, a former vice finance minister, has been considered the front-runner to succeed Fukui, who is a career BOJ official.

But DPJ chief Ichiro Ozawa has expressed reservations about Muto for his background as a Finance Ministry bureaucrat.

"Our policy is that bureaucrats should not parachute into other ministries and institutions," Ozawa said Jan. 22.

At the same time, however, Ozawa said the party would approve anyone with the ability to steer the BOJ and monetary policy, given the uncertainties dogging the economy.

BOJ watchers say Muto is the best choice because he has abundant experience and knowledge of both monetary and fiscal policy.

The next governor will receive a five-year term in which Japan has vowed to achieve a budget surplus in fiscal 2011 on a primary balance basis and increase its competitiveness in Asia, said Hideo Kumano, chief economist at Dai-ichi Life Research Institute. Muto may be best-suited to face these challenges, he added.

"The next governor needs to think both about the government's fiscal considerations and about raising the benchmark interest rate to a normal level," Kumano said. "If that is the case, Mr. Muto has more expertise than others."

If Muto becomes BOJ governor, he is more likely to be a coordinator for the eight other Policy Board members rather than an independent thinker, Kumano said.

Other candidates to succeed Fukui include Kazuo Ueda, a former Policy Board member who teaches economics at the University of Tokyo, former BOJ Deputy Gov. Yutaka Yamaguchi and Haruhiko Kuroda, president of the Asian Development Bank and a former vice finance minister for international affairs.

The government is expected to announce its candidate by midmonth.

Izuru Kato, chief economist at Totan Research Co., said the unanimous view of all parties involved will be that the next governor must be able to calmly deal with the ups and downs of the markets.

In that case, Kato said, Muto is the best option because he was serving as deputy governor under Fukui.

Observers agree that the next BOJ governor will have more options on monetary policy because "quantitative easing" has finally ended and the benchmark interest rate is now above zero.

The BOJ's ultraloose monetary policy had been in effect since March 2001 to fight deflation. The central bank then raised its key interest rate to 0.25 percent in July 2006 and to 0.5 percent last February as the economy improved.

But after the subprime mortgage crisis began erupting in the U.S. later in the year, fears of a recession began to grow, virtually eliminating any chance of the BOJ ending Japan's abnormally low interest rate regime. As recession fears grow, some market watchers are urging the BOJ to reverse course and slash the benchmark rate again.

Although many laud Fukui for guiding the central bank through an unorthodox deflation-fighting policy that helped corporate Japan pull the country out of its "lost decade," a scandal over his involvement in the Murakami fund tainted his reputation.

The scandal broke in June 2006, as he was laying the groundwork to finally end the "zero-interest-rate" policy, which had been in place for five years. After high-profile fund manager Yoshiaki Murakami was accused of insider trading during Livedoor Co.'s failed attempt to take control of Nippon Broadcasting System, Fukui admitted that he invested ¥10 million in Murakami's fund in 1999 and retained it after becoming BOJ chief in 2003.

Kato of Tanto Research said the Murakami revelation created the appearance of a conflict of interest that crushed Fukui's chances of being reappointed to a second term.

"If the Murakami fund scandal had not taken place, his reappointment would have been one of the choices," Kato said.

Kumano of Dai-ichi Life Research Institute said Fukui deserved some credit.

"It is the fruit of Fukui's effort that the central bank ended the quantitative easing policy and the abnormal state of the zero-interest-rate policy," Kumano said. "It could not have been carried out without Fukui's persistency."

Since the benchmark rate is currently 0.5 percent, (the next governor) has the choice of raising the interest rate or slashing it depending on the economic environment," he said. "He can cut the interest rate at first and carry out a rate hike in the future," Kumano added.



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