Japan’s bank crisis resolved, others remain

By Hisane Masaki

TOKYO — Masaaki Shirakawa, who took over as head of the Bank of Japan (BoJ) on Wednesday, faces the daunting challenge of preventing the world’s second-biggest economy sliding into a recession amid growing downside risks both at home and abroad.

Shirakawa, 58, comes with some strong credentials, despite being the government’s third choice for the post. He has been involved in financial policy planning at the BoJ for many years, served as a BoJ executive director between 2002 and 2006, and enjoys international recognition. But widely seen as a scholarly man, he will have to show largely untested administrative and leadership abilities to prove he is as suitable for the post of BoJ governor in his own right as the government’s third choice.

The appointment of Shirakawa, who has served as acting BoJ

governor since being appointed deputy governor on March 20, ended a three-week leadership vacuum at the Japanese central bank due to a political stalemate when his 72-year-old predecessor, Toshihiko Fukui, stepped down on March 19.

The opposition-controlled House of Councilors, or the Upper House, of the Diet, Japan’s bicameral parliament, approved the government’s nomination of Shirakawa on Wednesday, with all parties except the Japanese Communist Party voting in favor. Shirakawa was confirmed later in the day at a plenary session of Prime Minister Yasuo Fukuda’s Liberal Democratic Party (LDP)-led ruling coalition-controlled House of Representatives, or the Lower House.

Immediately after the Diet approval, the government formally appointed Shirakawa as new BoJ chief in a round-robin cabinet decision so he can leave on Thursday for Washington to attend the meeting of finance ministers and central bank chiefs from the Group of Seven (G7) major industrialized economies at the end of the week. The G7 comprises the United States, Canada, the United Kingdom, Germany, France, Italy and Japan.

The absence of a BoJ governor at the G7 meeting would have further underscored the lack of a sense of crisis among Japanese political leaders, eroded international confidence in the nation’s economy and added fuel to the sell-off of shares by foreign investors on the Japanese stock market.

The opposition-controlled House of Councilors however rejected on Wednesday the government’s nomination of Hiroshi Watanabe, 58, a former vice finance minister for international affairs, for the post of deputy BoJ governor to step into Shirakawa’s shoes, leaving one of the two deputy governor posts vacant.

The House of Councilors decided by 121 to 115 to reject Watanabe, with the biggest opposition Democratic Party of Japan (DPJ), the Japanese Communist Party and the Social Democratic Party voting against him. Three DPJ lawmakers voted for Watanabe in violation of the party decision and four other DPJ lawmakers either failed to attend the vote or abstained from balloting. Watanabe was approved by the House of Representatives.

Kiyohiko Nishimura, 54, was appointed to the deputy governor post on March 20. Nishimura, who served as a member of the BoJ’s Policy Board before taking the current post, is a former University of Tokyo professor. Chief cabinet secretary Nobutaka Machimura, the top government spokesman, said at a regular press conference on Wednesday that one of the two deputy governor posts will be left vacant for a while.

The DPJ, which decided on Tuesday evening to give Shirakawa the nod for the top BoJ post, had been widely expected to endorse his promotion because on March 12 it backed his nomination for the post of deputy governor. Shirakawa was a professor at Kyoto University until that appointment on March 20.

The DPJ decided on Tuesday to reject Watanabe’s appointment as deputy governor, although some of the party’s lawmakers had indicated earlier that the nomination would be approved. DPJ leader Ichiro Ozawa had expressed opposition to Watanabe’s nomination because of his background as a Finance Ministry bureaucrat.

The DPJ made the decision on how to vote on the government’s nominations of Shirakawa and Watanabe after the two nominees’ hearings in both houses of the Diet earlier in the day. DPJ secretary general Yukio Hatoyama told reporters that the party made the decision to turn down Watanabe because it opposes the practice of amakudari — or descent from heaven — in which senior bureaucrats land post-retirement jobs at entities related to the sectors they formerly oversaw.

Finance Minister Fukushiro Nukaga expressed his disappointment at the DPJ’s decision. »Why didn’t it endorse this talented person?» he said, arguing that Watanabe would be well suited to the job at a time of global financial turbulence.

The government’s first two choices for the BoJ governor post — Toshiro Muto and Koji Tanami — failed to clear the Diet after being rejected by the House of Councilors. Muto was nixed on March 12 and Tanami on March 19, the day Fukui’s five-year term as BoJ governor expired.

The House of Representatives, where Fukuda’s LDP-led coalition enjoys a two-thirds majority, approved both Muto and Tanami. The appointments of the BoJ governor and two deputy governors require the approval of both houses of the Diet.

Muto, 64, served as the Finance Ministry’s top bureaucrat until two months before taking the BoJ post five years ago. After joining the BoJ, Muto had been groomed by Fukui to be his successor. Until the triennial House of Councilors election last July, in which the DPJ became the largest party in that chamber and its opposition camp allies grabbed a majority of seats from the LDP-led coalition there, Muto had been widely considered to be an automatic successor to Fukui.

But the DPJ and smaller opposition parties claimed appointment of Muto as a the BoJ governor would threaten the central bank’s independence from the government in making monetary policy. They have made an issue of his 37-year career background with the Finance Ministry, including his holding the post of administrative vice finance minister, and clamored for the principle of keeping fiscal and monetary policymaking separate.

The DPJ and other smaller opposition parties also rejected the government’s second choice as Fukui’s successor, Tanami, 68, now governor of the government-affiliated Japan Bank for International Cooperation, citing his career background as a former administrative vice finance minister.

The government and the ruling LDP believed that the trio of a career central banker, a former career Finance Ministry bureaucrat and a private-sector academic would form the most balanced BoJ leadership. The two deputies of Fukui, a career central banker, were Muto, a former top Finance Ministry bureaucrat, and Kazumasa Iwata, a former professor at the University of Tokyo, whose terms also expired on March 19.

The ruling and opposition camps have traded blame on the imbroglio over the new BoJ line-up and warned that they would hold each other accountable for any consequences.

Meanwhile, Shirakawa, as new BoJ governor, takes the post at a time when the Japanese economy is teetering on the brink of a recession amid a stronger yen, spikes in prices for oil and other raw materials, and declining corporate capital investment. There are also persistent concerns about a possible prolonged recession in the United States and unstable global financial markets, both triggered by the US subprime mortgage crisis.

With Japan dependent on exports for growth, a higher value of the yen, which makes Japanese products more expensive on overseas markets, and an economic downturn in the US, Japan’s largest export market, both hurt the Japanese economy.

On March 19, the day Fukui stepped down as BoJ chief, the government downgraded its assessment of the economy for the second consecutive month. Economic and Fiscal Policy Minister Hiroko Ota said at the time that the nation’s longest postwar recovery, which started in February 2002, has hit a soft patch, or temporary lull, for the third time.

Ota said on Tuesday that that there is no change in her view that the economy is in a soft patch. Her comments came a day after the government said Japan’s diffusion index of coincident economic indicators stayed below the boom-or-bust line of 50% in February for the second straight month.

On April 1, the BoJ released a closely watched tankan quarterly survey showing that confidence at leading Japanese manufacturers worsened to its lowest in more than four years. The survey also showed large Japanese companies plan to cut business investment by 1.6% in fiscal 2008, which began on April 1.

At its two-day policy board meeting that ended on Wednesday, the BoJ, in a widely expected move, kept interest rates on hold amid mounting concerns over the outlook for the global, as well as Japanese, economy and international financial markets. The BoJ kept the unsecured overnight call rate — which the BoJ uses as the key target rate in the short-term money market — at 0.5%.

Shirakawa chaired the latest policy board meeting for the first time, but in his capacity as acting BoJ governor because he was formally promoted to governor after the meeting ended. With the BoJ’s top post still vacant during the meeting, seven members of the normally nine-member policy board made its Wednesday decision unanimously.

The BoJ itself also downgraded its view on the Japanese economy as well as its outlook on Wednesday, dropping a phrase used in recent reports that it was on a moderate expansion trend. Japan’s economic growth is slowing mainly due to the effects of high energy and materials prices, the central bank said in a report issued after the two-day policy board meeting ended. As for the outlook, the report said, Japan’s economy is expected to grow at a slower pace for the time being and follow a moderate growth path thereafter.

When Fukui took the reins at the Japanese central bank in March 2003, short-term interest rates were zero. In March 2006, the BoJ scrapped its five-year-old quantitative easing policy and returned to a more conventional regime of using as a monetary adjustment target the unsecured overnight call rate rather than the outstanding balance of current-account deposits held by private financial institutions at the central bank.

It was the first time in about 15 years, except for a brief period from the summer of 2000 to early 2001 in which the BoJ hastily lifted the zero-interest rate policy, that the central bank had reversed its policy to one of tightening. The quantitative easing policy was aimed at defeating deflation, which long plagued the Japanese economy by depressing corporate earnings and wages. Under the quantitative easing policy, which the BoJ introduced in March 2001, the bank flooded the nation’s financial markets with excess cash in the hope of encouraging borrowing and lending, while anchoring short-term interest rates at near zero.

In July 2006, the BoJ ended its near six-year zero-interest policy as the Japanese economy gained strength after a decade in the doldrums, lifting the target for the unsecured overnight call rate to 0.25% from in effect zero and the official discount rate to 0.4% from 0.1 % per annum.

In February 2007, the BoJ raised rates by a quarter percentage point again to 0.5%, in an attempt to rectify what the central bank itself views as the abnormal state of the credit policy. The official discount rate — which serves in effect as the cap on the overnight interbank rate because the BoJ provides loans to banks at the rate through its Lombard-type lending facility — was jacked up to 0.75% from 0.4%.

As governor, Fukui repeatedly warned of the dangers of keeping a very loose monetary policy. But the nation’s interest rates, still quite low by international standards, have been left on hold at 0.5% for more than one year amid growing concerns about the health of the economy.

While many analysts expect Shirakawa to pursue a similar policy to his predecessor and the BoJ to take a wait-and-see attitude by keeping interest rates steady this year, others predict a cut in rates in the near term as the uncertainty over the economy is growing.

In his confirmation hearing at the Diet on Tuesday, Shirakawa apparently tried to avoid committing himself about rates. He said the bank has no preconceptions about policy and will closely examine both upside and downside risks. Noting that the outlook for the Japanese economy is full of uncertainty, he reiterated that the bank is ready to take flexible action. But at the same time he said that it can take one to two years before the effect of policy emerges and that the BoJ needs to take longer-term risks into account.

Hisane Masaki (yiu45535@nifty.com) is a Tokyo-based journalist, commentator and scholar on international politics and economy.