BOJ repeating history, board exec from 2000 warns

by Tetsushi Kajimoto

When the Bank of Japan ended its “zero-interest-rate” policy at its two-day Policy Board meeting last month, Nobuyuki Nakahara recalled the last time the central bank made the same move, when he was a board member in August 2000.

Nakahara was one of two Policy Board members who voted against changing the policy in 2000, and he again believes the BOJ “should have waited another two to three months” before ending the zero-rate policy this time.

The former president of Tonen Corp. — now TonenGeneral Sekiyu K.K. — served on the Policy Board from April 1998 to March 2002.

A vocal critic of the BOJ’s lack of information disclosure and opaque decision-making, Nakahara recently published the book “Who Does the BOJ Belong To?”

He wants the Bank of Japan law to be revised to hold the central bank governor responsible for policy failures. Under a law now, the governor, who serves a five-year term, is responsible for explaining central bank policy but cannot be fired for any reason.

When the BOJ ended the zero-rate policy in August 2000, despite Nakahara’s opposition, it ended up returning to the rock-bottom interest rate policy eight months later after the collapse of the information technology-led bubble.

And the BOJ may end up reliving that mistake again this time, Nakahara said in an interview with The Japan Times.

The economy is less balanced now than the last time the BOJ lifted the policy, he said, citing the fall in individual consumption on one side and increases in net-export and corporate capital spending on the other.

“What I worry about most now is that the economy may suffer from stagflation,” in the near future, Nakahara said. Stagflation is when inflation is high but there is low growth.

The former Policy Board member warned that the global economy will enter a downtrend toward the end of the year, pointing to the U.S. housing bubble that is about to burst and soaring oil prices over uncertainty about the situation in the Middle East.

Nakahara said the stock market in Japan appeared to have peaked around April, while inventory of products in the leading information and technology sector is already increasing and may become slack toward autumn, similar to the pattern of five years ago.

Under these circumstances, Nakahara said, the BOJ will not be able to raise interest rates again. He said it might even be forced to revive the zero-interest-rate policy if it becomes clear the economy has peaked and will not exceed the postwar record stretch of economic expansion this fall.

“If stagflation occurs, in the worst-case scenario, nothing can be done to save it, just like during the oil crises” in the 1970s, Nakahara said. He predicted that the price of crude oil will hit $90 per barrel by 2010.

“Therefore, I believe the BOJ should have waited (before changing policy) for at least another two to three months to determine” the economic trend in the fall and the U.S. Federal Reserve’s position on hiking its interest rates further.

Nakahara said that, just as the last time, the BOJ appeared to have changed policy to assert its independence from the government.

“The BOJ seems to have acted more obstinately this time,” he said. He was referring to suggestions in the media that Gov. Toshihiko Fukui was personally indebted to Prime Minister Junichiro Koizumi for standing by him while he was under fire for having a large investment in the scandal-tainted Murakami fund and would be obliged to follow the government’s position on BOJ policy.

“The BOJ must have felt if it did not end the zero-interest-rate policy, people would suspect that Fukui was, in fact, indebted to Koizumi,” he said.

Recent opinion polls show that more than half of respondents think Fukui should resign over his investment in the Murakami fund, whose founder, Yoshiaki Murakami, has been charged with insider trading.

Nakahara thinks Fukui should decide his own course of action as the BOJ law guarantees the governor’s independence.

However, he said Fukui should be mindful of the BOJ’s regulations, which stipulate that central bank officials cannot engage in moneymaking endeavors that have the slightest whiff of impropriety. Nakahara said the question the governor must ask himself is whether his actions have raised public suspicion.