The Bank of Japan faces a tough decision at its Policy Board meeting later this week. Should it declare a formal end to its near-zero interest rate policy, adopting a more conventional monetary stance, or should it hold off until it is clear the economic stagnation that has haunted the country over the last 15 years is gone for good?
Whatever step the central bank takes — or doesn’t — at the meeting, it is sure to face criticism, leaving it open to political pressure in the future, experts believe.
This is especially true given the ruckus caused by BOJ Gov. Toshihiko Fukui’s investment in a fund led by Yoshiaki Murakami, who has been charged with insider trading.
“(The controversy) makes it hard for us to judge the BOJ’s policy decisions purely by the state of the economy,” said Hiromichi Shirakawa, chief economist at Credit Suisse Securities (Japan) Ltd. and a leading BOJ watcher.
The bank has lost credibility in its policy decisions and it will be hard to regain it, Shirakawa said. “Fukui’s dialogue with financial markets has fallen apart.”
On June 13, Fukui revealed he had invested 10 million yen in the Murakami fund when he worked for a private research firm, and he held onto the investment even after he became central bank governor in 2003.
In the ensuing uproar, Fukui offered on June 20 to take a 30 percent pay cut for six months to atone for any appearance of impropriety. Then last Friday, the BOJ announced a new set of restrictions on investments by bank executives.
The central bank’s credibility faces a crucial test at the next policy meeting, scheduled for Thursday and Friday.
With the economy recovering, the BOJ is widely expected to tighten its monetary grip by scrapping its “zero-interest-rate” policy at the meeting.
But many politicians and bureaucrats oppose the shift, fearing it may damage the recovery. The Finance Ministry in particular does not want interest rates to rise, which would increase the burden of the government’s mountain of debt.
Whatever decision it makes, the bank will come in for criticism, analysts said.
“If the bank raises rates, many will argue Fukui is trying to deflect attention from his personal affairs. If it doesn’t, Fukui’s enemies will argue that he is continuing to try to boost those funds with easy liquidity,” Glenn B Maguire, Asia Pacific chief economist at Societe Generale in Hong Kong, said in a newsletter published July 3.
Others think if the BOJ does not raise rates, financial markets will see it as a sign the bank is giving in to political pressure.
Fukui will be criticized regardless, Maguire said.
Like central banks in other industrialized countries, the BOJ is independent from the government.
Under the Bank of Japan Law, which was revised in 1997, the governor cannot be dismissed except in cases of illness or bankruptcy.
The law also prohibits the government from reversing the bank’s decisions. The government has the right to request the postponement of a decision taken at a BOJ board meeting, but nothing more.
Yasuhide Yajima, senior economist at NLI Research Institute, said the degree of the BOJ’s independence is not that different from that of its counterparts in the United States and the European Union.
However, the BOJ had slack rules governing its executives’ investments and disclosure of their assets, Yajima said.
The investments of officials at the U.S. Federal Reserve Board, by contrast, are strictly regulated by law. It also has blind trust ethics rules that urge policymakers to turn their assets over to third parties before taking office. They are also required to disclose their assets, Yajima said.
Despite the criticism leveled at Fukui, Prime Minister Junichiro Koizumi and other government officials have defended him, insisting the investment did not violate BOJ rules because at the time the central bank regulated only officials’ trading in stocks, not investment funds.
But opposition lawmakers said it was unethical of Fukui not to have liquidated the investment when he took over as head of the central bank, because the rules also say officials should refrain from any action that may undermine its impartiality.
In response to the outcry, the BOJ hastily drafted new rules on July 7, barring its executives from investing in stocks, bonds and other financial products during their time in office and for one year after retirement.
Under the new rules, BOJ Policy Board members, including the governor and deputy governors, are required to disclose their personal assets.
And while some in the opposition have called for Fukui to step down over the investment, financial experts are divided on the issue.
Some say Fukui should not step down because he did not break the law or BOJ rules in place at the time.
Others believe he should resign because his ability to communicate with financial markets has been impaired, and to help restore the bank’s credibility.