Prime Minister Junichiro Koizumi on Monday nominated former Bank of Japan Deputy Gov. Toshihiko Fukui, who is not considered an aggressive deflation fighter, as the new BOJ chief, according to government sources.
The sources said Koizumi also named as deputy governors two people who have urged the central bank to act more aggressively: Toshiro Muto, former vice minister of finance, and Kazumasa Iwata, a senior official at the Cabinet Office and an economics professor at the University of Tokyo.
The long-awaited appointments come at a critical time for the economy as prices continue to fall, eating into corporate profits and depriving people of jobs.
Fukui, 67, who left the BOJ in 1998 amid a bribery scandal involving the bank, is currently director of think tank Fujitsu Research Institute. He will join the eight-person BOJ Policy Board on March 20, subject to Diet approval. The appointments of Iwata and Muto also need Diet endorsement.
Fukui will be the first governor under the new BOJ Law enacted in April 1998, which increased the bank’s independence from the government. The governor’s tenure is five years.
Koizumi said he expects the new governor to take a proactive stance in fighting deflation and strengthening the financial system. But he declined to confirm the names of the three nominees, citing the Diet procedure.
Hailing from Osaka, Fukui joined the BOJ in 1958 after graduating from the University of Tokyo. He became deputy BOJ governor in 1994 after taking such posts as executive director.
The favorite of BOJ officials, Fukui is essentially an endorsement of the status quo. The choice of Fukui as governor makes unlikely drastic unconventional moves by the BOJ.
By contrast, Iwata supports the BOJ committing to making prices rise by a specific date. Both Muto and Iwata differ from Fukui and are strong advocates of further credit-easing steps, such as the BOJ buying outright more government bonds.
It’s a selection that makes no definite statement, although it may mean a split vote between the governor and his deputy governors at Policy Board meetings, observers said.
The choice is also a bow to the BOJ and an admission of how limited Japan’s policy options are, some observers said.
Like outgoing Gov. Masaru Hayami, whose term expires March 19, Fukui has argued that monetary policy alone will not turn around deflation.
That argument earned Hayami a barrage of criticism from politicians in Nagata-cho. The rhetoric peaked just prior to Koizumi making his choice of governor, when many politicians called for someone who would set an inflation target.
Why then choose Fukui, who seems to be in line with Hayami?
The question instead should be “why not?” said Hajime Yamazaki, chief consultant of the investment-consulting department of UFJ Institute, a commercial bank-affiliated think tank.
“For Mr. Koizumi, Mr. Fukui may be a politically dull choice,” Yamazaki said. “But upholding the status quo is safe when you can’t see too clearly the merits of the alternatives.
“It’s not as if choosing Mr. Fukui will solve the economy’s problems, but neither will anyone else. For the economy, there’s no big difference between one choice and another.”
Little help is forthcoming from the government, either in the form of tax reforms or large fiscal spending.
The budget deficit continues to rise, with the outstanding balance of government bonds projected to hit 50.5 trillion yen at the end of the fiscal year, discouraging room for more massive fiscal spending.
“The buck stops here,” said a senior BOJ official. “If stocks fall, if unemployment rises, if the economy takes any turn for the worse, you blame the BOJ.”
And each time economic indicators slide, the BOJ has felt obligated to react even if too little and too late, the official said.
The BOJ has kept interbank interest rates at virtually zero for more than four years, with the BOJ pledging two years ago to continue its ultra-easing policy steps until the consumer price index climbs above zero.
Despite flooding markets with extra funds, the consumer price index continues its four-year slide, and BOJ Policy Board members say they don’t see a reversal anytime soon.
If easing is so slow to reverse deflation, keeping the BOJ happy might be a wise option for the government, some observers said.
“Given the limited policy options for both the government and the BOJ, it is essential that the two work more closely together, just for the time being,” said Masatoshi Sato, economist at Mizuho Investors Securities Co.
Fukui’s nomination “means the least amount of disturbance within the BOJ and probably smooth implementation of further monetary policy,” Sato said.
The choice is in part out of consideration for the BOJ’s jealously guarded independence, observers said.
Fukui will be claiming a seat that was said to be his five years ago. Instead, the seat went to Hayami, who was also a former BOJ official, as Fukui and then Gov. Yasuo Matsushita resigned to take responsibility for the bribery scandal.
Until the resignation, Fukui had been called the “prince” of the central bank, and was virtually assured of becoming BOJ governor.
As Hayami has been fond of saying, monetary easing just does not work anymore.
The BOJ has direct control over the base money the sum of currency in circulation plus BOJ reserves. This grew 13.4 percent from a year before. But those funds haven’t reached beyond the banking system. The quantity of money in the economy inched up only 2 percent, while bank loans fell 3.6 percent year-on-year.
True, there are structural problems. Banks’ problem loans and their depleted capital bases means they can’t afford risk, and funds are slow to make their way from banks to individuals, corporations and local governments, the BOJ says.
But some economists say that if the BOJ would pump even more funds into the banking system, eventually some would find the way to the economy.
“Under Hayami, the BOJ never assumed responsibility for creating the starting point for deflation,” said Jesper Koll, chief Japanese economist at Merrill Lynch & Co. “They never once studied the dangers of an economy in deflation.”
With interest rates near zero, and with the BOJ unable to push interest rates down further to stimulate more lending, there is little room for the central bank to maneuver, he said.
Whether the central bank will regain its relevance, and whether the world’s second-largest economy will regain its relevance in global financial markets, depends on Fukui’s ability, according to Koll.
“Never underestimate the power of a central bank,” he said. “The central bank should do what it can, which is control money and prices.”
He suggested trying at the very least increasing the base money by 20 percent to 25 percent year-on-year consistently, and seeing what happens.
Indeed, in the absence of other immediate measures to help the economy, there seems little other hope.
“Japan is increasingly losing its relevance in global financial markets,” said Paul Sheard, chief economist at Lehman Brothers in Tokyo. “Much hangs on Fukui’s ability.”
BOJ vice governor nominees
Toshiro Muto won the confidence of Prime Minister Junichiro Koizumi while serving as vice finance minister.
Koizumi’s abortive policy of curbing the annual issuance of new government bonds to no more than 30 trillion yen is said to have originated in part from Muto’s advice.
Muto’s tenure as the top bureaucrat at the Finance Ministry for two years and seven months until his resignation in mid-January is the longest in the postwar era.
Muto calls Toshihiko Fukui, Koizumi’s choice for new governor of the BOJ, “one of the most reliable BOJ men,” and strongly recommended him as the new central bank chief. Their acquaintance dates back to the first half of the 1970s when Muto was a Banking Bureau official at the ministry.
Muto, who joined the ministry in 1966, was demoted from the post of director for the secretariat at the ministry in 1987 to take responsibility for a series of entertainment scandals involving ministry officials.
In 1987, Muto was demoted from the post of director for the secretariat at the ministry to take responsibility for a series of entertainment scandals involving ministry officials.
Kazumasa Iwata is known as an advocate of drastic change in the central bank’s momentary policy, including the adoption of inflation targeting to bring deflation under control.
The 56-year-old Iwata, currently director general for Economics Assessment and Policy Affairs at the Cabinet Office, is expected to call for an increase in the BOJ’s purchase of government bonds as part of his policy stance.
In the fiscal 2001 government white paper on economic and fiscal policy, Iwata referred to a “numerical target of price stabilization” that was a virtual inflation target.
Iwata also drafted the 2001 “large-boned policy” that is the foundation of Prime Minister Junichiro Koizumi’s structural reform initiative.
Last May, Iwata declared that the economy had bottomed out, although the BOJ did not share the assessment.
Iwata joined the Economic Planning Agency, the predecessor of the Cabinet Office, in 1970 after graduating from the University of Tokyo.
An expert on macroeconomics, Iwata moved to the university as an assistant professor in 1986 and became a professor in 1991.
Iwata has concurrently held his post at the Cabinet Office since January 2001.
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