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Thursday, April 10, 2008

Tough call on rate cut awaits new governor


Staff writer

The past three weeks have been something of a roller coaster ride for Masaaki Shirakawa, the former career central banker who was appointed Bank of Japan governor Wednesday by both chambers of the Diet.

News photo
Masaaki Shirakawa (fifth from left) and other Bank of Japan Policy Board members hold a meeting Wednesday. POOL PHOTO

Just last month, the 58-year-old was appointed BOJ deputy governor. But with the top post left vacant for the first time in postwar history due to political wrangling, Shirakawa had to take the role of acting governor as well. The five-year term of the previous governor, Toshihiko Fukui, ended March 19 without a replacement having been chosen.

After the Democratic Party of Japan-led opposition shot down two previous candidates chosen by the government — Toshiro Muto and Koji Tanami — the path was cleared for Shirakawa to step in to lead the central bank of the world's No. 2 economy.

"Every day has been hectic so far and I haven't had enough time" for things other than what is absolutely necessary for the job, Shirakawa said at a news conference Wednesday.

Economists said the coming few months will be a challenge for Shirakawa as Japan may suffer a further economic slowdown that may force the BOJ to slash its benchmark interest rate.

If that is the case, "Mr. Shirakawa will need to change the course of monetary policy and, at the same time, send a message to the market in a very short period of time," said Yasuhide Yajima, senior economist at NLI Research Institute. "It's a little worrying."

Yajima added that pressure for a rate cut will increase if the next "tankan" survey of business sentiment, to be released in early July, shows worsening results as it did in the latest survey unveiled last week.

The BOJ left its key interest rate at 0.5 percent in a unanimous vote at its Policy Board meeting Wednesday.

Ryutaro Kono, chief economist at BNP Paribas in Tokyo, said the BOJ will probably halve its interest rate to 0.25 percent in May and further to 0.15 percent in July.

"The BOJ's scenario in which production, income and spending grow in a favorable cycle is beginning to fall apart," Kono said. "The BOJ needs to change the scenario and Shirakawa needs to tell that to the market."

Rising commodity prices are pushing down business results, especially for small and midsize firms, forcing them to slash investment and salaries, and causing weak consumption, Kono explained.

But unlike some market watchers who cast doubt on Shirakawa's ability to communicate with the market, Kono said he is not worried.

"A BOJ governor needs to be someone who has expertise in finance and can explain the reasons behind monetary policy changes to the market or else the effect of the policy will be limited," he said. "In that sense, Mr. Shirakawa has the qualifications."

Until his retirement in July 2006, when he became an economics professor at Kyoto University, Shirakawa had spent 34 years at the central bank.

In 2002, he was appointed BOJ executive director, working at the bank's secretariat to map out monetary policy. He served in that post until 2006, when the bank ended the so-called zero-interest-rate policy, whereby it injected ample liquidity into financial markets to keep the interest rate at around zero.

Steering the bank is made all the harder for Shirakawa because he only has one deputy governor to work with for the time being — Kiyohiko Nishimura, a former professor at the University of Tokyo. The DPJ-led opposition rejected Hiroshi Watanabe, a former vice finance minister for international affairs, for the other deputy governor's seat Wednesday.

It is unclear when the government will be able to come up with another nominee, Chief Cabinet Secretary Nobutaka Machimura said.

"I cannot immediately come up with another suitable person for the post," Machimura told reporters. "The post is likely to remain vacant for some time."

The BOJ Law stipulates a nine-member Policy Board, two of whom are deputy governors.

Although the DPJ has claimed that appointing a former Finance Ministry official for a top BOJ post will undermine the central bank's independence, economists have a different view.

Yajima of NLI Research Institute said it makes sense to appoint someone who has served at the Finance Ministry at a time when Japan needs to reduce government debt.

"That is a very difficult task and it needs coordination with the Finance Ministry," Yajima said. "It is regrettable that (politicians) have not considered that point."



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