If the rest of the world wasn’t so preoccupied with financial market meltdowns and currency upheavals, it might take the time to muse – even briefly – about the great irony behind the tragi-comic events engulfing the usually decorous Bank of Japan.
Imagine if the reappointment of Mervyn King at the Bank of England had been blocked, for whatever reason, or US Congress had rejected Ben Bernanke’s appointment at the Fed, leaving either bank without a successor as central bank governor. Or consider if, in the first place, the approval process for a new chief at any major central bank was left to blunder along just days before the incumbent governor’s departure.
Both developments have unfolded in full, embarrassing glory in Tokyo. And yes, you really couldn’t make it up: as Japan’s exporters and carry traders scream with pain after the yen broke Y100 to the dollar, it now looks increasingly likely that the BoJ – one of the world’s key central banks – will be leaderless and rudderless after the incumbent, Toshihiko Fukui, steps down on Wednesday.
At the heart of this unseemly state of affairs is vociferous political opposition in Japan’s Diet, or parliament, to the government’s choice of successor, Tohiro Muto – a clearly competent, if unexciting, ex-finance ministry bureaucrat.
The opposition Democratic Party of Japan, which seized control of the Diet’s upper house, has resolutely opposed Muto’s appointment, much to the embarrassment of the Fukuda government.
And here’s the irony: the DPJ opposes Muto’s candidacy because, it claims, his finance ministry background would mean he was too close to the government and thus would compromise the central bank’s independence.
But actually, the notion that such a supposedly key appointment can be left to such last-minute political wrangling – and most likely leave the central bank without a governor – suggests that it doesn’t really matter too much if Muto is or is not “too close” to the government line.
Besides, with zero interest rates for most of the 11 years since the BoJ officially gained independence, there has never been a time where any BoJ governor has rocked the boat – at least publicly. Sure, there were big moments when the BoJ hiked Japan’s interest rates to 0.25 per cent in 2006 and then to their current “high point” of just 0.5 per cent in February 2007, but both moves were seen as in step with government views.
As the FT noted on Friday, the drama is mainly one about Japan’s international image. In practice, the BoJ can function without a governor. Both houses of parliament have now approved Masaaki Shirakawa as BoJ deputy governor and he would probably become acting governor if a replacement for Fukui was not in place by Wednesday.
The crisis at the BoJ is unlikely seriously to impair Japanese monetary policy, which most economists believe is in a holding pattern following two recent rate rises. But it is deeply embarrassing for the government, especially as it comes at a time when the global economy is facing turmoil in the financial markets.
If Japan cannot name a central bank governor before Mr Fukui’s term ends, “it just makes them a laughing stock”, said one Japan specialist.
As John Richards, head of research at RBS in Tokyo, said: “This is the second largest economy in the world. We need a governor… In the current global turmoil, the BoJ is potentially a very, very powerful player on the global stage and not to have a governor at the helm is irresponsible”.
As if the BoJ humiliation weren’t enough, Reuters reports on Friday that in another sign of deepening political paralysis, the opposition DPJ, which would love to force a snap election, said it would not pass budget-related tax measures before the end of the fiscal year on March 31.
Luckily, rescue may be on the way for the BoJ, at least. After Prime Minister Yasuo Fukuda declared on Thursday: “I am troubled” [by the political opposition to Muto], his chief cabinet secretary Nobutaka Machimura said on Friday: “The prime minister will give careful consideration to the matter on the premise that we will not create a vacuum”.
While it’s no laughing matter, we can’t help wondering what Act II of “BoJ Frolics” will bring.