Prime Minister Shinzo Abe shortened his list of candidates for Bank of Japan (8301) governor as he seeks to end decades of reluctance at the central bank to accept responsibility for the nation’s inflation rate.
Abe is probably narrowing down his picks, Economy Minister Akira Amari told reporters in Tokyo yesterday. The government should unveil the name, and replacements for deputies whose terms are up in coming weeks, by the end of February, the ruling party’s upper-house legislative affairs chief said last month.
Abe, who took office five weeks ago, yesterday said he expects the BOJ to take responsibility for a 2 percent inflation target -- a point he’s made repeatedly since the bank agreed to set the objective Jan. 22. Outgoing Governor Masaaki Shirakawa, by contrast, during his tenure emphasized that ending two decades of deflation isn’t something the bank can do on its own.
“It’s very likely we will see a big change in monetary policy toward easing,” said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo and a former Bank of Japan official. “This is the most crucial event for Japan’s economy this year,” because any failure to appoint a more aggressive BOJ chief “will reverse the trend of a weak yen, damage corporate sentiment and hurt Japan’s economy,” he said.
The yen has tumbled 13 percent since mid-November in anticipation of the stepped-up monetary stimulus that Abe’s Liberal Democratic Party has called for. The LDP in December swept to victory in an election for Parliament’s lower house. A surge in the yen in recent years has eroded Japan’s export competitiveness, with a report yesterday showing manufacturing employment fell below 10 million for the first time since 1961.
The short-list to replace Shirakawa, whose term concludes April 8, is probably composed of Asian Development Bank President Haruhiko Kuroda, former BOJ Deputy Governor Kazumasa Iwata and Toshiro Muto, another ex-deputy, according to Masaaki Kanno, chief economist at JPMorgan Securities Japan Co., who used to work at the central bank.
Kuroda, who once wrote that the BOJ should set a 3 percent inflation target, was a career bureaucrat who rose to vice finance minister in charge of currency policy. He has led the Manila-based ADB since 2005.
Muto, chairman of the Daiwa Institute of Research, said in an interview last month that he’s changed his view from 2007, when as a deputy he repeatedly said that keeping interest rates too low could be problematic. He now says that ending deflation is the top priority, and that “I strongly think that a policy of monetary easing is justified.”
Iwata, head of the Japan Center for Economic Research, has championed the idea of the central bank buying foreign-currency bonds to reverse exchange-rate appreciation. The LDP last year said it would consider the proposal.
Takatoshi Ito, an academic economist who served a stint at the Finance Ministry and is now dean of Tokyo University’s Graduate School of Public Policy, is another potential BOJ chief, the Nikkei newspaper reported last month without citing sources. Ito said in an interview in December that the BOJ had been too cautious, and also advocated foreign bond purchases.
Abe gets a chance to reshape the entire management team of the central bank, with the terms of Deputy Governors Kiyohiko Nishimura and Hirohide Yamaguchi concluding March 19.
“As two deputy governors will be replaced in March and the governor in April, we should expect further easing at the April 26 monetary policy meeting,” Kanno wrote in a note last week.
Abe reiterated yesterday in parliament that “I expect the BOJ to take responsibility for achieving the 2 percent inflation target as soon as possible.”
BOJ statements indicate it has yet to accept such responsibility. In a joint release with the government Jan. 22, the bank said it was “responsible for maintaining financial system stability.” As for inflation, the statement explained that the bank “conducts monetary policy based on the principle that the policy shall be aimed at achieving price stability.”
In its Jan. 22 statement, the BOJ board said that to overcome declines in consumer prices quickly, “efforts by a wide range of entities to strengthen growth potential are critical.” By comparison, the Federal Reserve said last year when it set its own 2 percent target for the U.S. that “the inflation rate over the longer run is primarily determined by monetary policy.”
One potential BOJ candidate indicated he shares Abe’s view that it’s the bank’s job to end deflation. Kikuo Iwata, an economics professor at Gakushuin University in Tokyo, told ruling LDP lawmakers two days ago that monetary policy alone can do the job.
Iwata is among the contenders to succeed Shirakawa at the BOJ, according to Koichi Hamada, a retired Yale University economics professor who is advising Abe on monetary policy. Hamada himself said in an interview in December that the next BOJ governor can end deflation within months of taking the job.
While Abe’s coalition government has a majority in the lower house, it will need opposition support in the upper house to win confirmation for its nominees. Yoshimi Watanabe, who heads one group, Your Party, said in an interview last month that Heizo Takenaka, the bank-crisis tsar in a former LDP administration, would be a good pick for BOJ governor.
Japan last had 2 percent annual inflation in 1997, when a sales tax was increased, with no sustained price gains of that magnitude in two decades. Falling prices reduce incentives to borrow and invest in new business projects, erode tax receipts and increase the attractiveness of saving in cash rather than spending or putting money into stocks or bonds.
Consumer prices excluding fresh food dropped 0.2 percent in December from a year before. Unadjusted for changes in prices, the nation’s gross domestic product in the third quarter of last year was 17 percent smaller than at its peak in 1997.
While Shirakawa studied at the University of Chicago in the era of Milton Friedman -- the Nobel laureate who said inflation is “always and everywhere a monetary phenomenon” -- the governor has said a lack of demand is deflation’s root cause, rather than monetary conditions. On Jan. 29, 2010, he told an audience there was no “magic wand” to stamp out falling prices.
Shirakawa’s predecessor Toshihiko Fukui also rejected any Friedman-style definition of deflation, saying in March 2003 that price declines were “not just a monetary phenomenon.”
Fukui’s forerunner, Masaru Hayami, had opposed the idea of an inflation target. He said in March 2001 that while over 10 or 20 years an excess or shortfall in money supply might correspond with changes in prices, over shorter time periods “a variety of other variables” determined the cost of living.
Yasuo Matsushita, who served as governor 1994-1998, repeatedly said deflation was unlikely even as his nation was on the verge of entering entrenched price declines.
“We may see a regime change for Japan’s monetary policy,” said Mikihiro Matsuoka, chief economist at Deutsche Securities Inc. in Tokyo. “I don’t expect Japan’s inflation can actually reach a targeted 2 percent, but the bottom line is we may be able to see a different picture of the economy in the process of Japan’s heading to the 2 percent target -- it will prop up economic growth, help lift companies’ profits, incomes for households and the government’s tax revenues.”
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