BOJ fracas could transform JapanÆs political landscape

In the struggle to appoint a new Bank of Japan governor, the opposition Democratic Party is out to gain power rather than simply broker a sweet deal.
Two weeks ago, the consensus was that the problem of appointing a new Bank of Japan governor would be resolved swiftly. The opposition Democratic Party of Japan (DPJ) would obtain some juicy political concessions in return for accepting the governmentÆs candidate, but the incumbent Liberal Democratic Party's (LDP) icy grip on power would remain unchecked.

However, the DPJ unexpectedly rejected the governmentÆs candidate, current deputy governor Toshiro Muto, during the Diet nomination session last week. This action means that the DPJ is substantially raising the stakes. And on Monday, the DPJ went one step further, rejecting an extension of current governor Toshihiko FukuiÆs term. Fukui is to retire on March 19 after serving a five-year term.

What appeared to be a case of political squabbling is now seemingly being replaced by a genuine attempt to unseat the LDP from power for the first time since 1994.

The tactical weapon for this is the extension of the gasoline tax bill. This tax is unpopular but the government is keen to extend it for another 10 years in order to repair the governmentÆs poor finances. Ultimately, the constitution ensures the lower house must override the upper house. But the DPJ can delay the bill so that there will be a gap between the termination of the old bill and the renewal of the bill.

ôIf this gap occurs, there could be a lot of confusion. Prices would drop by Ñ25 per litre. Gasoline retailers would be furious because their stock has had tax paid on it, and they would be selling it at a loss. And the government would look as if it is not in control of the situation,ö says Susumu Kato, chief economist at CLSA in Tokyo.

Such an outcome, coupled with the embarrassing lack of a BOJ governor and a deteriorating economic situation, could lead the current Prime Minister Yasuo Fukuda to resign, or to call an early general election. An election has to be called in any case by the spring of 2009. If Fukuda were to resign, a new prime minister could be found from within the ranks of the LDP without a general election. But if disgust against the LDP builds up much further, the party might reluctantly call a general election to legitimise its new leader.

The backdrop to the DPJ hardening its stance is complex. Muto is a former ministry of finance bureaucrat, who joined the BOJ along with current governor Fukui. Until the BOJ won formal independence in 1998, the MOF controlled the BOJ and used it to push through its 'quantitative easing' policy between 1999 and 2003. This policy of printing money to bring down interest rates and provide JapanÆs banks with a fat net interest margin between rock bottom deposits and Japanese government bonds was successful in rehabilitating the banks. But it deprived JapanÆs aging population of interest income on their deposits and on their holdings of government bonds. The DPJ believes interest rates should rise beyond the current 0.5% level and therefore wants a BOJ governor who has no links to the low interest faction at the MOF. DPJ secretary general Yukio Hatoyama, for example, told a press conference last week that the BOJ should stop purchasing government bonds and driving down yields, as this cheap money policy encourages fiscal indiscipline.

ôQuantitative easing was not a macroeconomic policy, it was a measure designed to help banks. Depositors were sacrificed to allow this to happen,ö comments CLSAÆs Kato. Kato adds the consumers were further squeezed by collapsing asset prices while consumer prices kept edging up in real terms.

Quantitative easing has taxed the public for the errors committed by the LDP-business-banking nexus in the run-up to the bubble created in the 1980s û allowing the bubble to happen in the first place, and then raising interest rates so sharply that the boom collapsed more painfully than was necessary, in the eyes of some critics. The cheap money available in Japan today is a lifeline to many banks and companies that some domestic and many foreign critics believes should go bust. There have been two interest rate hikes of 25bp each since July 2006, but rates are still the lowest in the industrialised world.

The BOJ vacuum is not the only LDP problem. The government has generated confusion and fear by its loss of 50 million pension records, an embarrassing naval accident and a botched introduction of new building legislation. The loss of the pension records directly affects JapanÆs ageing population, some of the countryÆs poorest inhabitants among them.

The ability of the DPJ to take on the LDP is mixed. Ichiro Ozawa is the DPJÆs leader and a former member of the LDP. But he lost credibility last year when he endorsed a ægrand coalitionÆ with the LDP. His party has younger, more hawkish members, who are more interested in toppling the LDP than in haggling for concessions. However, Ozawa is considered essential to the partyÆs election prospect.

The DPJÆs tactics have been criticised as being irresponsible. Moves to force out the LDP have been frowned upon if they make Japan look bad in the international community û for example, not having a central bank governor. Such thinking plays into the LDPÆs hands, of course. The DPJ will have to strike a fine balance between chastising the LDP and political opportunism if it is topple a system where the LDP, the bureaucracy and big business have fused into one seemingly impenetrable whole.
¬ Haymarket Media Limited. All rights reserved.
Share our publication on social media
Share our publication on social media