Bank of Japan nominee faces political wrangle

Posted in Japan | 07-Mar-08 | Source: International Herald Tribune

Toshiro Muto has been picked by the government to head the Bank of Japan.

Muto proposed as new chief for Bank of Japan

TOKYO: The Japanese government put forward the deputy central bank governor Toshiro Muto on Friday as the next head of the Bank of Japan, a senior ruling party lawmaker said, raising the prospect of a showdown with the opposition.

A political wrangle over the governor nomination has dented the government's credibility and raised fears of a policy vacuum at the Bank of Japan, whose current governor, Toshihiko Fukui, is due to retire in less than two weeks.

The names of compromise candidates had been floated, but Liberal Democratic Party lawmaker Takashi Sasagawa said the government had nominated Muto, 64 - long seen as the government's favored candidate.

He was also the pick of the markets, polls showed, despite the risk the opposition may veto the nomination. Some opposition lawmakers say a former senior bureaucrat such as Muto may be too close to the government.

"We have been saying at informal meetings that it would be hard to accept Muto if he is nominated," Kenji Yamaoka, parliamentary affairs chief of the main opposition Democratic Party, told reporters.

The nomination came as the central bank left interest rates unchanged at 0.5 percent at Fukui's last policy board meeting as governor.

The bank has kept monetary policy on hold since raising the key overnight call rate target from 0.25 percent in February last year.

With Fukui's retirement imminent and global markets in turmoil, ministers called for an end to political rows over the appointment.

The political deadlock has prompted talk of a policy vacuum if parliament cannot agree who should replace Fukui.

"We cannot allow any policy vacuum with the BOJ governor at a time when global economic conditions are unstable," the Finance Minister, Fukushiro Nukaga, told a news conference on Friday.

"I hope both houses of parliament will take the proper steps."

Opposition parties can block Muto because they control parliament's upper house, which must approve the appointment.

If he gets past the political hurdle, Muto will take charge of the central bank at a time when growth in Japan is stumbling, thanks to the credit crunch that has raised fears of a U.S. recession.

Some economists say Japan, the world's second-biggest economy, may already be in recession and the Bank of Japan may need to cut its already very low interest rates this year.

If a replacement is not found by Fukui's retirement date of March 19, a temporary governor would step in.

But it is unlikely that a stopgap governor would be able to take long-term decisions, analysts say.

Muto is a political artist who can blend economics with insider expertise to get things done in the country's powerful government bureaucracy.

Since he arrived at the central bank in 2003, Muto has worked closely with Fukui. Many see him as having been groomed for the top job from the start.

Some say Muto is less hawkish than his boss and he might be more likely to cut interest rates in the face of weaker growth as global fallout grows from the U.S. subprime mortgage crisis.

"Muto may seek to raise rates in the long term, but his policy handling will be pragmatic in the near term," said Naomi Hasegawa, a senior strategist at Mitsubishi UFJ Securities.

Many Bank of Japan officials think Muto's experience as a budget negotiator is a huge advantage, as central bank staff are often long on economic theory but short on skills in political maneuvering.

Muto, 64, spent most of his career at the Ministry of Finance, rising to become vice finance minister, the ministry's top job for a bureaucrat.

A lack of English language skills may be a drawback for his ambition for the top central bank job, however, at a time of global financial stress when coordination between major central banks is increasing.

Muto is known to people who have worked with him as impartial and reliable, but away from the office he paints flamboyant, surrealist oil paintings. An admirer of French painter Marc Chagall, he exhibited at a gallery near the central bank in 2004.

The contrast is striking, until one realizes that Muto tells you he deliberates carefully before putting brush to canvas, and that even his painting is part of a carefully planned life - to prepare him for retirement.

Muto joined the central bank in the midst of financial crisis as Japan battled to repair moribund banks and end deflation.

After the banking mess was fixed and the economy started growing steadily, he oversaw the bank's exit from its unorthodox policy of flooding banks with cash and subsequent rate hikes.

In 2006, when Fukui was caught in a scandal over his personal investments, it was Muto's efforts to deter angry politicians that helped his boss stay in his post, Bank of Japan watchers say.

Muto has always sided with Fukui in monetary policy decisions, and his public remarks have rarely gone beyond a repetition of the bank's official statements, carefully calculated not to shock markets.

"The economy will be slowing down in the near future but it will likely expand moderately in the long run," he said last month.

If he becomes governor, Muto will inherit an economy that appears to be running out of steam after more than five years of expansion, strained by persistently weak domestic demand, a slump in housing investment and the threat of a U.S. recession.

Markets are pricing in around a 60 percent chance of a rate cut by the end of this year, a sea change from half a year ago, when investors thought rates would be doubled to 1 percent before Fukui retired.

That may be partly because Muto is seen as less hawkish than Fukui, a career central banker who has pushed to raise rates out of fears that loose money will lead the economy to overheat.

A Reuters poll in January found 32 of 53 Tokyo market players want Muto to take the helm at the bank.

However, it is politics rather than markets that could sink his candidacy.

The new chief needs to be approved by both chambers of Japan's parliament, and opposition parties hold a majority in the upper house.

Some senior opposition lawmakers have said having a former finance ministry heavyweight as Bank of Japan head could jeopardize the central bank's independence, especially at a time when the government might put pressure on it to keep rates low to ease the pain of financing Japan's huge public debt.