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Saturday, March 8, 2008

Jury still out on Fukui's legacy

Likely to be remembered for efforts to 'normalize' rates


Staff writer

What thoughts were going through Bank of Japan Gov. Toshihiko Fukui's mind on the last day of the BOJ Policy Board meeting Friday — the final one before his term ends March 19 — is anyone's guess.

But it must have been an emotional day for Fukui as it coincided with the government's nomination of BOJ Deputy Gov. Toshiro Muto as his successor.

The proposal was submitted to the Diet after weeks of tug-of-war between the ruling coalition and the opposition camp, led by the Democratic Party of Japan, whose support holds the key to Muto's Diet approval.

It may be too soon to talk about the legacy of Fukui's years as BOJ chief, but he will no doubt be remembered as the man who tenaciously tried to push up the central bank's interest rate to what he called a "normal level."

Observers, however, are critical of Fukui's self-imposed goal of "normalizing" the unusually low interest rate that has continued since 1999 as Japan struggled to pull itself out of the economic doldrums.

"It's not the mission of a BOJ governor to raise the interest rate to what he or she believes to be the normal level," said Yutaka Harada, chief economist at Daiwa Institute of Research. "The mission of the central bank is to create an environment where the economy is good and without inflation."

If the BOJ sets multiple goals, Harada said, they will interfere with each other and send mixed messages to the market.

Harada also criticized Fukui for ending the ultra-loose monetary policy and the "zero interest rate" policy too soon, while growth of the consumer price index was still hovering around zero percent.

Kikuo Iwata, a professor of economics at Gakushuin University, said Fukui's 2006 decision delayed the end of deflationary pressures.

Fukui's notion of normalizing the interest rate is widely seen as an attempt to give more flexibility to the BOJ's monetary policy so it can either raise or lower rates based on economic conditions.

The BOJ also wanted to prevent a recurrence of the bubble economy of the late 1980s, whose collapse in the early 1990s caused long-term economic problems for Japan. The central bank has been harshly criticized for helping to create the bubble boom because of the slow pace at which it raised interest rates in the 1980s, BOJ officials say.

Fukui denied that he was intent on a rate hike. "We don't mean to raise the interest rate at any cost," Fukui said after the board meeting.

Fukui's drive to normalize rates became apparent after the BOJ ended the ultra-loose quantitative easing policy in March 2006 as well as the zero-rate policy four months later.

The quantitative easing policy, which was introduced in March 2001 under his predecessor, Masaru Hayami, allowed the BOJ to flood the financial system with liquidity by using its current account balance to anchor short-term interest rates near zero.

In July 2006, the central bank raised the benchmark overnight call rate to 0.25 percent, putting an end to the zero-rate policy for the first time in more than five years. The rate was raised further to 0.5 percent in February 2007.

Since then, the BOJ has tried to raise rates again but had to hold back because the economy did not recover as fast as it had hoped. And the market volatility stemming from the U.S. subprime loan crisis — which surfaced last summer — has made it virtually impossible for the BOJ to raise the rate anytime soon.

Observers agree meanwhile that Fukui has done his job better than Hayami, who at one point ended the zero-rate policy even though the nation was mired in deflation.

Hayami, a career BOJ official, was criticized by government officials and lawmakers for temporarily ending the zero-rate policy in August 2000 based on the judgment that deflationary pressures did not pose a serious risk to the economy.

At that time, the economy was facing a downward risk amid the bursting of the IT bubble in the United States in 2000 and the consumer price index was falling on a year-on-year trend. Hayami was forced to reinstate the zero-rate policy in March 2001.

After Fukui took the post, he made clear he was determined to fight deflation, increasing the current account balance target at a quick pace to pour cash into the financial system.

When the BOJ introduced the quantitative easing policy, the current account balance target was set at around ¥5 trillion, but it was gradually increased to between ¥30 trillion to ¥35 trillion under Fukui.

"Some members of the BOJ Policy Board at the time believed that deflation was not much of a problem, but Fukui persuaded them and continued with the quantitative easing policy," said Iwata of Gakushuin University. "That is worth praising (Fukui) for."

But Iwata said problems still lie within the BOJ.

"The biggest problem at the BOJ is that it has been managing monetary policy without making a (numerical) commitment," he said. "It is not clear what it wants to achieve."

The BOJ should commit itself to a midterm inflation target of around 2 percent, like other industrialized economies, and take responsibility for achieving that goal, he said.

"Because its goal is not clear, it is vague what Fukui means by the need to 'normalize' the interest rate," Iwata said. "Unless the BOJ comes up with that goal, it is meaningless to discuss who should become the next governor."



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The Japan Times

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