The Japanese government was on Thursday no closer to resolving a crisis over the leadership of the Bank of Japan as a surging yen threatened to aggravate an already worsening economic climate. The yen surged through the Y100 to the dollar milestone for the first time in 12 years. Accompanying that was more bickering between the government and opposition Democratic Party of Japan over who should take the helm at the central bank when the current governor steps down next Wednesday. The ruling Liberal Democratic party won the approval of the lower house of Japan’s parliament on Thursday for the government’s nominee to head the central bank, Toshiro Muto, and its two candidates for deputy governor. But that did nothing to clarify who will lead the central bank as Muto has already been vetoed by the upper house, which the DPJ has controlled since elections last July.
The DPJ’s rejection of Mr Muto and the LDP’s refusal to consider an alternative, has increased the prospect that the BoJ will be without a governor unless the two sides can come to an agreement in the next few days.
The uncertainty over the leadership of the BoJ comes as the global economy faces the risk of a serious downturn. “This is the second largest economy in the world. We need a governor,” says John Richards, head of research at Royal Bank of Scotland in Tokyo. In practice, the BoJ can function without a governor. Both houses of parliament have now approved Masaaki Shirakawa as BoJ deputy governor and he would likely become acting governor if a replacement for Mr Fukui was not in place. Most BoJ watchers agree that the lack of a governor will not seriously affect monetary policy decisions. For one thing, “there is no real monetary policy issue pending,” says Mr Richards.
Having raised interest rates twice, to a still historically low 0.5 per cent, the BoJ had been prevented from making further moves by a weakening economy at home and looming slowdown in global markets. Nevertheless, as the yen’s relentless surge against the dollar further undermines an economy that many believe is already in recession the lack of a governor will make it difficult for the central bank to make any bold policy decisions, economist warn. “It will be difficult for the Policy Board to make major decisions . . . until the new governor is in place,” says Robert Feldman, chief economist at Morgan Stanley in Tokyo. Perhaps more worrying is that the BoJ will find it more difficult to move aggressively in response to the impact of global problems on the Japanese economy and what the central bank can do about them, economists say. “In the current global turmoil, the BoJ is potentially a very, very powerful player on the global stage and not to have a governor at the helm is irresponsible,” says Mr Richards. The lack of a governor could hinder smooth communications with financial markets and other central banks, says Hiromichi Shirakawa, chief economist at Credit Suisse in Tokyo.
Markets need some to whose pronouncements they can respond, he says. And “the BoJ needs a governor sitting in his office and directly talking to other central bank governors and exchanging views informally. That job cannot be done by the deputy,” he says. “Of course, the deputy governor would play that role, but the fact that he would be an acting governor would weaken his credibility,” Mr Shirakawa says. As the global credit crisis worsens, Japan’s continuing failure to appoint a central bank governor cannot be dismissed as Japan’s problem alone.
Financial Times
