The Bank of Japan’s governor, Mr. Masaru Hayami, is to retire in late March when his five-year term expires. At the moment, who will succeed him is a matter of speculation. There is no question, however, that the next governor will face the same difficult challenge that has confronted the outgoing governor: curing the insidious deflation that continues to plague the Japanese economy.
Prime Minister Junichiro Koizumi, asked at a press conference the other day what type of person he will pick as the new BOJ chief, said he prefers a “person who is positive about fighting deflation and well-informed about the international situation.” Economics Minister Heizo Takenaka says he favors an “activist who will pursue monetary policy aggressively while sharing the same sense of crisis (as the government) in the battle against deflation.”
The Bank of Japan Law states that the governor will be appointed by the Cabinet with the consent of the Diet. This means, for all practical purposes, that the prime minister has the authority to select the head of the central bank. Prime Minister Koizumi will have to make the best choice possible from a wide field of candidates, bearing in mind the central bank’s independence as well. The last thing he should do is name a “yes man” for the government.
The central bank’s primary mission, of course, is to maintain confidence in the yen and promote price stability. The governor’s job is to guide monetary policy along these lines so as to ensure sound development of the economy. To do the job right, however, he needs to meet a set of fundamental requirements.
First and foremost, he or she must be an expert in financial affairs. The highly specialized nature of monetary policymaking demands a person of such caliber as the chief of the central bank. The central banker must also have high moral standards. Yet moral rectitude cannot be substituted for financial expertise.
Second, the central banker must be a person dedicated to the principles of fairness and impartiality. Monetary policy almost always involves certain conflicts of interest. A change in interest rates, for example, cuts both ways, bringing either gains or losses, depending on whether you are a borrower or a lender. It is essential, therefore, that the BOJ chief remain detached from specific interests.
Third, the governor, as with any top leader of an organization, must be able to make quick and correct decisions. This is particularly true when the bank is at odds with the government and ruling parties over monetary policy. The BOJ must have the courage and conviction to spurn any unwarranted political demands or pressure.
Fourth, the BOJ chief must have an international outlook — a natural requirement that flows from the ongoing globalization of national economies as well as the global status of the Japanese economy. A degree of proficiency in English is required. The central bank governor holds frequent contacts and exchanges with central bankers and finance officials from other countries.
If Mr. Koizumi can find a person who meets all these requirements, fine. At the very least, he should choose one who has expert knowledge of financial affairs, a deep dedication to fairness and a strong will to do what he or she believes is right.
It used to be that the Bank of Japan was headed alternately by a former career bureaucrat from either the Finance Ministry or the central bank. That practice collapsed amid a public backlash against a bloated and corrupt bureaucracy. However, the next governor should be selected with an eye to the future. The door should be left open to all qualified persons, including ex-bureaucrats as well as business leaders and academics. Deflation must be the chief concern of all would-be governors. The question is how to treat the malaise. One way — a very controversial one — is to set an inflation target. In fact, the bank is being urged, by politicians and others, to do whatever it can to raise prices artificially (by purchasing stocks and real estate, for example). However,it should resist such inflationary pressure. Higher prices, if not accompanied by new demand, will likely lead to “stagflation” — inflation with little or no economic growth. With financial markets already awash in surplus money, inflation could get out of control. If that happens, the yen will likely go into a free fall.
It is of vital importance, therefore, that the next Bank of Japan governor stay clear of any unreasonable political pressures to create a false sense of prosperity through the dubious method of inflation targeting. In other words, he or she must have the strong will and the unflinching courage to reject what is wrong.
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