Japan Still To Find New Bank Chief

Sydney Morning Herald

Monday March 17, 2008

Justin Norrie in Tokyo

ELEVENTH-HOUR efforts have failed to resolve a succession crisis at the Bank of Japan, increasing the possibility the central bank will be left leaderless during a world financial crisis.

The prospect came a step closer last week as some analysts declared the world's second-largest economy was following the United States into recession.

Many have also warned that a failure to find a replacement by Wednesday's deadline will add to uncertainty in global markets, which this week watched as the Nikkei Stock Average dived to a close of 12,241, the lowest finish since August 2005.

The central bank's governor, Toshihiko Fukui, finishes his five-year term this week. Attempts by the ruling Liberal Democratic Party to replace him have been thwarted by the opposition-controlled upper house.

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, the former finance minister Toshiro Muto, is compromised by his ties to the ruling party. The bank has been independant from the ministry for only 10 years.

It also blocked the appointment of Takatoshi Ito, a University of Tokyo economist, to one of two deputy positions. Professor Ito serves on a committee that advises the Prime Minister, Yasuo Fukuda, on economics.

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

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

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

One government source told the Herald 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." Other sources say if the issue is allowed to fester, it could push the Government closer to a general election.

Naoki Iizuka, a chief economist at Mizuho Securities, agreed 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 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 declined 12 per cent last year - against an upswing in most Asian markets - and are continuing to fall. Capital spending dropped by 7.7 per cent 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 credit crisis in the US, it appears Japan is now being buffeted by the backwash. New figures show industrial output fell 2.2 per cent in January from December as electronic-device makers and car makers cut production in response to the US slowdown.

The biggest concern for foreign investors, however, is the recent surge in the yen against the US dollar to about Y100. That has prompted many to abandon the leveraged carry trade, which for several years allowed them to borrow large amounts of low-yielding yen in order 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 ...

The fast-rising price of commodities such as iron ore and grain, largely imported from Australia, is also being keenly felt.

Editorials in the biggest-selling newspapers have accused the Democrats of unnecessarily politicising the process of appointment. The public has remained on the sidelines, apparently unsure which of the two political camps to hold accountable.

In a speech to foreign media, a 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 still, he said, was the Government's neglect in failing to encourage foreign investment in the country's xenophobic marketplace and its failure to give women sufficient support to join the workforce in greater numbers.

Japan's declining population is expected to reduce its sputtering economic growth to zero by 2050, said Japan's Centre for Economic Research. By then, 70 per cent of the workforce will be gone.

Even the typically reserved Mr Fukui admitted the economy faced "downside risks" when announcing last week his decision to keep the interest rate on hold at 0.5 per cent for the 11th successive time.

For all the alarmist pronouncements, however, most economists agree whoever takes the reins from the departing governor is unlikely to make substantial changes to the bank's monetary policy.