Succession Dispute Leaves Bank Of Japan Vulnerable In Crisis

The Age

Saturday March 15, 2008

Justin Norrie, Tokyo

ELEVENTH-HOUR efforts to resolve a succession crisis at the Bank of Japan have failed to come up with a breakthrough, increasing the possibility that the central bank will be left without a leader during one of the world's greatest financial crises.

The embarrassing prospect grew more likely yesterday as some analysts declared that the world's second-largest economy was already following the US into recession.

Many have also warned that a failure to find a replacement by the Wednesday deadline will add to uncertainty in global markets, which this week watched as the Nikkei Stock Average dived to 12,433.44, the lowest finish since August 2005.

Governor Toshihiko Fukui will finish his five-year term in four days. So far the ruling Liberal Democratic Party's attempts to replace him have been thwarted in the Opposition-controlled upper house of parliament.

The Democratic Party of Japan, which seized power over the house in last year's historic landslide election, says the man appointed to replace Mr Fukui, former finance minister Toshiro Muto, is compromised by his ties to the ruling party. The bank has only enjoyed independence from the ministry for 10 years.

It also blocked the appointment of Takatoshi Ito, a professor at the University of Tokyo, to one of two deputy positions. Mr Ito serves on a committee that provides economic advice to Prime Minister Yasuo Fukuda.

The lower house, where the governing coalition enjoys a considerable majority, approved both nominations on Thursday. But that vote is meaningless without support from the upper house.

As the stalemate intensified this week, Mr Fukuda refused Opposition demands that he offer an alternative successor, such as former bank director Masaaki Shirakawa, who has already been approved for the other deputy position.

At the least, economists say, Mr Shirakawa would likely serve as an interim chief in the event the deadlock is not broken by Wednesday.

One senior government source told BusinessDay that "the (ruling coalition) is quite scared about the fallout from this".

"There's a sense of panic because there's a real chance we might go for weeks without an official leader during March and April,"said the source.

Others say that if the issue is allowed to fester, it could push the Government closer to calling a general election.

Naoki Iizuka, chief economist at Mizuho Securities, agreed that there was a "strong probability that there won't be anyone in charge for some length of time because neither party is prepared to buckle on this. To do so means losing face.

"Having said that, it's better that the Government takes its time than rushes through someone who's not up to the job. Japan is staring at major economic upheaval. It's already in recession. This has to be done the right way."

Japanese stocks fell 12% last year - against an upswing in most Asian markets - and are continuing to fall. Meanwhile, capital spending decreased by 7.7% during the last quarter of the year. It was the third quarterly drop in a row.

Despite being largely shielded from the initial brunt of the US credit crisis, it appears Japan is being buffeted by the backwash. New figures show industrial output fell 2.2% in January from December as electronic-device and car makers cut production in response to the slowdown in the US economy.

The biggest concern for foreign investors, however, is the recent surge in the yen against the US dollar.

That has prompted many to abandon the leveraged carry trade, which for several years allowed them to borrow large amounts of low-yielding yen to buy higher-yielding foreign currencies such as the Australian dollar.

"The only thing that has kept Japan going was a cheap yen and the world boom," said Charles Dumas, from Lombard Street Research, at a recent investor briefing. "Now they are gone . . . Probably Japan is in recession in the first half of this year."

The rapidly rising price of commodities such as energy, iron ore and grain - imported in large part from Australia - is also being keenly felt.

Mr Iizuka said Japan's central bank had been slow to prepare for the inevitable, but felt that the Opposition had the most to lose from the showdown.

"They've had a chance to take government in the past and failed," he said.

"This is the same performance all over again and people might see through it."

Editorials at the nation's biggest-selling newspapers have also accused the Democrats of unnecessarily politicising the process of appointment.

The Japanese public, however, has remained on the sidelines, apparently unsure which of the two political camps to hold accountable for the stoush.

In a speech to foreign media, former bank official Mikio Wakatsuki lambasted both, saying it was "almost a national disgrace that this issue remains unresolved at this very late hour - especially when the world financial situation is facing a very uncertain time".

More shameful, he said, was the Government's failure to encourage foreign investment in Japan's notoriously xenophobic marketplace and give women enough support to join the workforce in greater numbers.

Japan's rapidly declining population is expected to reduce economic growth to zero by 2050, according to the Japan Centre for Economic Research. By that time, 70% of the workforce will be gone.

Economic and Fiscal Policy Minister Hiroko Ota sounded an ominous note in January when she told parliament that she felt "a sense of crisis because Japan has not nurtured industries that will grow in the future".

Even the typically reserved outgoing governor Fukui admitted the economy faced "downside risks" when announcing, at a valedictory policy meeting last week, his decision to keep the interest rate on hold at 0.5% for the 11th successive time.

Mr Fukui was responsible in 2006 for lifting the interest rate above zero for the first time since 1999.

During the last financial crisis, the central bank introduced a 0% interest policy to pump cash into the banking sector to promote lending and growth.

For all the alarmist pronouncements, however, most economists agree that whoever takes the reins from Mr Fukui is unlikely to introduce major changes to the bank's monetary policy.

KEY POINTS

? Bank of Japan needs to appoint a new governor by Wednesday.

? Economists agree that whoever takes over is unlikely to introduce major changes.