Sunday, February 10, 2008

Bank of Japan Governor Succession as Good as Done

Ichirō Ozawa was in Chiba City, where some comments he made during a press briefing had the media playing a guessing game. Namely, did Mr. Ozawa give the nod, however tentative, to Toshirō Mutō, the Fukuda administration’s choice as the successor to Toshihiko Fukui, the next Governor of the Bank of Japan? The Governor must receive the approval of both House of the Diet, but the ruling coalition does not command a majority in the Upper House. Since the Communists and Social Democrats will never vote in favor of the government’s candidate and there is no supermajority override available, the Fukuda administration needs the DPJ’s consent in order to make the appointment.

Mr. Fukui’s term ends on March 19, but a reappointment was never in the cards after he nearly lost his job in 2006 due to his investment in the Murakami Fund. The dip in the global stock market and the concomitant economic uncertainties triggered by the subprime loans crisis has lent an added urgency to the swift resolution of the succession.

By all accounts, Mr. Mutō is a fine candidate for the assignment. He has kept his nose clean as Deputy Governor since his appointment in 2003, and is generally well-regarded in most quarters. In fact, the only serious DPJ objection against Mr. Mutō is that he is a former Administrative Vice-Minister of Finance. For the DPJ regards his promotion as a violation of “”zaisei-kinyū bunri no gensoku (the principle of separation of fiscal and financial [policies])”.

This was the situation under which the press popped the question to Mr. Ozawa, and the media recorded more or less the same words. However, they chose to spin it in different directions. And for once, they do not arrange themselves along ideological lines, or according to their proximity to the administration. Look at the headlines:

Asahi: BOJ Governor Appointment Decision “Blank Sheet”, Will Respect Decision of Party Subcommittee(日銀総裁人事「白紙」、党小委の判断尊重 民主・小沢氏)

Mainichi: BPJ Governor: Does Not Disavow Mr. Mutō (日銀総裁:武藤氏の昇格否定せず…民主党・小沢代表)

Yomiuri: DPJ Chief Ozawa Leaves Door Open to Mr. Mutō’s Promotion to BOJ Governor (民主党の小沢代表、武藤氏の日銀総裁昇格に含み)
Sankei: “Completely a Blank Sheet” Mr. Ozawa on BOJ Governor Appointment (「まったくの白紙」 日銀総裁人事で小沢氏)

Actually, it’s a done deal, even if they don’t realize it yet. There’s little more than a month to go, so it’s too late to come up with an alternative. No serious bank is going to cough up its successful president at short notice to assume the top spot at BOJ. The best it could do would be to offer its chairman - largely a ceremonial post - or a vice-president who is slated to be on the way out anyway. That is not a good message to be sent to the market. And that’s assuming that he passes the rigorous vetting process. That leaves Kazumasa Iwata, the other deputy governor. Now Dr. Iwata is a fine economist and appears to favor an expansionary monetary policy, so it’s plausible. But he’s a lifelong academic, though he did spend his first 14 years after university as a government economist**. Mr. Mutō is the guy that the establishment wants, and the DPJ has little to gain and much to lose in terms of political credibility by pressing this case without a publicly compelling reason; a surprise nomination at this point is a highly remote possibility at most.

* The former Economic Planning Agency. The best and brightest at the EPA tended to leave as soon as they could land a tenured (associate) professorship at a prestigious university. Dr. Iwata landed in Tokyo University. He did return to his old haunts (now merged into the Cabinet Office) in 2001 to take charge of state-of-the-economy and economic-policy analyses until he was appointed to his current job in 2003.

(Pre-post ADD) I often let something that I’ve written lie until the next day. Some of them never get posted, saving me a lot of embarrassment. This was another one that I put away as a draft yesterday, and what do you know, the media reports from Seoul tell me that Yoshihito Sengoku, former DPJ Policy Research Council Chairman, pushed back on Mr. Mutō’s putative appointment, crfiticizing the BOJ, saying, “Are there (other) central banks buying 1.2 trillion yen worth of state bonds every month?”* With regard to Mr. Mutō, he said that “if you evaluate (the financial policy taken in the five-years under Governor Fukui), logic does not lead to elevating [Mr. Mutō] to Governor.”* By this logic, Dr. Iwata, or any other of the current board members for that matter, would be inappropriate.

Mr. Sengoku is not just any other DPJ Diet member. He is the head of the DPJ subcommittee that vets candidates for appointments subject to Diet approval, and Mr. Ozawa was clearly referring to that subcommittee when he stated that the decision would be made in the appropriate department. Moreover, Mr. Sengoku hails from the old Socialist Party, and does not see eye to eye with Mr. Ozawa. Could he use the vetting process to force Mr. Ozawa away from any thoughts of collaborating with the Fukuda administration?

But does this change the overall trajectory? Should I rewrite my narrative above the line? Not at all. There have been a string of news reports over the past week suggesting that the LDP was in the process of putting the final touches on Mr. Mutō’s candidacy and that Mr. Ozawa was opening the door to Mr. Mutō’s acceptance. The media had no choice but to pop the question; and Mr. Sengoku had no choice but to answer negatively, if only to preserve his prerogative. Mr. Sengoku may or may not be ill-disposed to Mr. Mutō, and he may or may not wish to undermine Mr. Ozawa**. His critique of Mr. Fukui’s steerage is a common, if not accepted uncritically, one. However, a wholesale disqualification of banking officials associated with Mr. Fukui’s steerage would paralyze the BOJ. I do not believe that Mr. Sengoku can take his statement to its ultimate conclusion. He will extract his pound of flesh when he cross-examines Mr. Mutō. But the potential reception of the financial market and the resultant damage to the DPJ’s reputation will be such that the usually reasonable Mr. Sengoku will acquiesce with time to spare before the March 19 deadline.

* The quotes have been reconstructed from Asahi , Yomiuri (hard copy only), and Sankei articles.

** In fact, he was in Seoul as part of a multiparty delegation to South Korea led by two left-center LDP leaders, Taku Yamazaki and Kōichi Katō. According to the Yomiuri, some people in the DPJ take the trip as a sign that Mr. Sengoku may be plotting against Mr. Ozawa. Whatever the truth of the matter may be, you don’t go on a bipartisan junket and use the occasion to undermine the LDP on the BOJ appointment.


ross said...

Hi Jun,

I basically agree with your take. There is no reason for the DPJ to appear accomodative, just reasonable. Moreover, they need to protect themselves from any blame for market turmoil that is ostensibly linked, correctly or not, to uncertainty over BOJ policy.

Plus, the DPJ doesn't want to end up in power facing a hawkish central bank. And Iwata, the other deputy governor besides Muto, is considered the most dovish member of the BOJ policy board. So if the choice is really between Muto and Iwata, Muto is probably a better choice.


Jun Okumura said...

Actually, I do not think that Mr. Iwata was ever really in the running, but he had to be considered as a matter of logic if Muto ended up unacceptable because of his MOF background.