Shirakawa quick to dive into the deep end at G7

by Shinya Ajima

WASHINGTON (Kyodo) No toasts were raised, no flowers were handed out. Only the challenge of hard work awaited Bank of Japan Gov. Masaaki Shirakawa as he made his debut at a meeting of financial leaders from the Group of Seven major economies over the weekend in Washington.

It was just two days after he took the governorship of the BOJ that he joined the community of financial chiefs Friday on the frontline in the battle against the global financial crisis following the meltdown of the U.S. subprime mortgage sector.

Shirakawa, 58, a former BOJ executive director who would have otherwise taught monetary policy at a university, became BOJ deputy chief last month and was promoted to the post of governor after the Diet rejected two former vice finance ministers due to objection from opposition parties.

He takes the helm of the BOJ as its 30th chief at a time when the G7 is showing a gloomy world economic outlook.

“The global economy continues to face a difficult period,” finance ministers and central bank governors from Britain, Canada, France, Germany, Italy, Japan and the United States said in a statement after their meeting.

At a news conference after the meeting, Shirakawa said, “There is a high possibility that the world economy will continue to grow, helped by growth in emerging economies, although the pace of its expansion slows.”

Given the slowdown in the U.S. economy, the global financial market turmoil and rising inflationary pressure from commodity price hikes, however, Shirakawa said, “Uncertainty surrounding the world economy has been increasing.”

Both the government and the BOJ have already been forced to downgrade their assessment of the Japanese economy. The government cut its assessment in its monthly report for March, indicating the longest postwar boom has hit a lull once again.

The BOJ earlier this month released the result of its closely watched “tankan” survey, which revealed a further deterioration in business sentiment.

In its monthly report released Wednesday, the BOJ downgraded its assessment, admitting “Japan’s economic growth is slowing.” The same day, the central bank left its key interest rate unchanged at 0.5 percent for the 14th month running.

As uncertainty over the Japanese and global economies grows, Shirakawa is facing difficult monetary policy management. He is under growing pressure at home and abroad to cut interest rates, although the BOJ apparently wants to eventually raise rates to more historically normal levels.

While trimming its growth estimates for Japan in 2008 and 2009 in its recent biannual report, for example, the International Monetary Fund said, “In light of the prevailing head winds to growth, monetary policy should maintain its accommodative stance and could be eased further in the face of a serious downturn.”

In March 2006, Toshihiko Fukui, Shirakawa’s predecessor, who left the BOJ on March 19, ended the five-year-old ultraloose quantitative-easing policy, under which the central bank flooded the financial system with ample liquidity to drive its key short-term interest rate to around zero.

Since then the BOJ has raised its key short-term rate twice, 0.25 percentage point each time. But the global credit squeeze and the sluggish domestic housing market as a result of tighter building regulations have forced the bank to hold back from keeping the borrowing cost from rising.

Osamu Takashima, chief currency analyst at Bank of Tokyo-Mitsubishi UFJ, said the main scenario for Shirakawa remains that the BOJ will wait until it is the right time to again raise interest rates.

But he also said, “A really tough question to him may come when what the BOJ describes as a ‘virtuous cycle of growth in production, income and spending’ weakens,” adding that financial instability in the U.S. and Europe may increase pressure on the BOJ to cut interest rates.

Hiromichi Shirakawa, chief economist at Credit Suisse, however, cast doubt on the effect of rate cuts in Japan for the moment.

“It is very vague what and how much (the BOJ) could change only by cutting the main rate from 0.5 percent to 0.25 percent,” he said.

“We should not expect the BOJ to decide rate reductions by depending only on its short-term view,” he said, adding that the new BOJ chief may put more weight on longer-term judgment on growth outlook.

At the Washington meeting, the G7 again fell short of working out any specific concerted action to ease global credit concerns.

Experts said the possibility of joint interest rate cuts is small.

For the U.S. Federal Reserve, a possible recession in the United States is its main concern, but the European Central Bank is putting emphasis on inflation risks in the 15-nation euro zone and Japanese rates are too low to cut, they said.

With a shy smile, Shirakawa said after the G7 meeting, “I was happy that both my old and new friends in the central banking community gave me a warm welcome.”

It made a sharp contrast with his inaugural news conference in Tokyo, where the new BOJ governor said, “Frankly speaking, I was really puzzled by what happened to me over the last month,” referring to the political wrangling over the BOJ leadership.

But it seems Shirakawa has no time to waste as his new challenge — to prevent an economic slump in Japan and weather the global financial crisis — has already begun, requiring careful monetary policy management.