Playing chicken over next BOJ chief

Shinya Ajima
Uncertainty has been growing over the selection of the next Bank of Japan governor as opposition parties threaten to block the government’s nominee with just one week to go until the incumbent chief’s term ends.

With the ruling and opposition parties both apparently playing chicken, showing no signs of compromise and accusing each other of creating the likely vacancy in the post of central bank chief, Japan risks losing its credibility as a leading economy, analysts said.

“As a symbolic development, a BOJ without its governor would only give an unfavorable impression to foreign investors,” said Takashi Omori, chief economist at UBS Securities Japan Ltd. “Political uncertainty has always had a certain effect on them of selling Japanese stocks.”

He denies any prospect of immediate confusion in financial markets but said, “It is unavoidable that overseas investors will think there is something wrong with Japan’s governing system.”

The Diet process to choose the BOJ’s new executives — the governor and his two deputies — got under way Tuesday with hearings held for the candidates. The government on Friday nominated Toshiro Muto as new central bank chief to replace Toshihiko Fukui, whose five-year tenure ends March 19.

Muto, currently one of two deputy governors at the BOJ, has been under fire from the opposition parties. Given his career background as a former vice finance minister, his appointment would damage the bank’s independence from the government in making monetary policy, the opposition camp said.

Ichiro Ozawa, leader of the main opposition Democratic Party of Japan, is leading the attack on the government and ruling coalition.

About a month ago, he was regarded as supportive of the nominations, sending messages to the government that the DPJ would accept Muto as governor and Masaaki Shirakawa, a professor at Kyoto University, as one of his deputies, sources close to the matter said.

The government nominated Shirakawa along with Takatoshi Ito, a University of Tokyo professor, as the central bank’s two deputy governors Friday.

The prospective agreement between the government and the DPJ over the nominees suddenly fell apart late last month when the ruling coalition led by Prime Minister Yasuo Fukuda’s Liberal Democratic Party bulldozed the fiscal 2008 budget and a tax reform bill through the lower house despite calls from the opposition camp for more deliberations.

Ozawa openly criticized the move, saying the DPJ’s “relations of trust with the government and the ruling bloc have been completely lost.”

The DPJ-led opposition camp controls the House of Councillors. Rejection by the upper house would block Muto’s appointment even if it were approved by the more powerful House of Representatives, where the ruling camp holds a majority, as the appointments of the BOJ governor and two deputies require approval by both houses of the Diet.

Fukuda has shown his intention to hold direct talks with Ozawa to seek a breakthrough on the issue. But such negotiations seem impossible partly because there remains strong opposition within the DPJ to such talks.

“Mr Ozawa is unable to convince other DPJ members of the rightfulness of holding a meeting with Mr. Fukuda,” a source close to the DPJ said.

Last year, serious cracks were revealed in the largest opposition party with Ozawa coming under fire from other DPJ lawmakers after he met Fukuda to talk about a grand coalition to break the policy stalemate as a result of the opposition bloc’s control of the upper house.

To take responsibility for the confusion, Ozawa offered to resign as DPJ chief. But he was soon convinced by the party not to step down.

“There remains awkwardness between Ozawa and some young DPJ lawmakers,” said the source, who asked not to be named.

Analysts increasingly see it as likely that the DPJ will reject Muto’s nomination later this week and demand the government offer alternative candidates, possibly including Yutaka Yamaguchi, a former BOJ deputy governor, who has been widely regarded as the DPJ’s favorite.

If the DPJ accepts Muto, “it would only leave the image that the DPJ made a compromise and that would negatively affect the party’s attempt to come to power in the next lower house election,” Tsutomu Fujita, equity strategist at Nikko Citigroup Ltd, wrote in a recent report.

Some argue, however, that the DPJ must understand that it would only lose public support if it sticks to the position of simply criticizing the government and rejecting all the proposals it makes.

The conflict over the BOJ appointments may only strengthen the perception that “Japan is revealing the immaturity of its political system,” said Yutaka Oishi, professor of political sociology at Keio University.

“In this game of chicken, it seems the parties are still unable to find a point where they should hit the brakes,” he said.