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Bank of Japan: Losing
independence?
By Richard Hanson
TOKYO - Start with the obvious.
Confucius defined government more than 2,500
years ago simply and clearly as an effort to "put things
right" or "put things in order" with the help of "true
persons". These were learned followers of the teachings
of Confucius - the guy who practically invented
political and social science in China - who served as
benign adherents to the words and deeds of the old man.
The latter serves as a sort untouchable moral
compass or de facto mirror for society and its values; a
role model of common sense and a keen sense of serving
the good of society. "The measure of man is man" might
ring a distant bell as an enduring sound bite.
So where is the ghost of Confucius as the Bank
of Japan (BOJ) and the country need him and a whopping
shot of moral and political fortitude?
Nowhere.
Here is the problem.
The Bank of Japan, say over
the past few months, has attempted to spell out a number
of new, radical (by BOJ standards) central-bank-like
initiatives or findings regarding state-of-the-nation
matters. For one, BOJ faced up to the reality of
mistakes and lessons of the 1980s and 1990s, as Japan's
stock and property bubbles developed and burst.
Deflation on a broad scale zapped wide swatches of the
economy, which endured three major recessions.
A
US Federal Reserve task force concluded that BOJ was
slow to respond to the deflationary threat, while
falling prices spread across a broad range of sectors in
a recession-prone economy, causing high unemployment.
BOJ failed to lower interest rates quick enough. Nobody
in power looked good in the 1990s.
The country
saw a numbing series of scandals - many of the greed or
stupidity variety. BOJ's inner sanctums were invaded in
a raid on its headquarters when officials were caught
breaking the law. A governor and deputy governor quit
their posts prematurely in 1998. This led to the
appointment of governor Masaru Hayami, now 77, whose
term expires on March 18.
BOJ learned important
lessons about the dangers of deflation. One is that
fiscal measures and monetary measures are difficult to
prescribe. From the year 2000, BOJ took the radical (for
a central bank) step of imposing a zero-interest-rate
policy - literally shoveling interest-free liquidity
into the ailing banking industry. Deflation and falling
prices continued. But central bankers took strong note
that Japan did not suffer from runaway deflation.
This was significant. BOJ worried that
deflationary pressures could become pronounced in other
regions, especially the rest of Asia, where monetary
controls were less effective. But BOJ also resisted
arguments calling for setting inflation targets to
provide boosts for the economy. Meanwhile, BOJ under
Hayami has embarked on non-central-bank-like policies.
Most striking was a decision last summer to
support bad-loan-burdened banks directly through a
scheme of buying some of the stocks that banks carry on
their books to improve their flow of funds. Inside and
outside the BOJ, there is greater acceptance that in
this time of economic funk, falling growth requires more
aggressive use of the bank's resources to aid financial
institutions and bolster the economy.
"The Bank
of Japan is becoming more a part of the government,"
observes one retired senior BOJ official. That is a
double-edged sword for any central bank that values its
independence. There are also squawks from a little-heard
vested-interest group: BOJ shareholders, who own shares
in the BOJ the corporation. Risky operations risk
reducing profits and dividend payments. (BOJ's cash cow
is a monopoly on buying money from the Ministry of
Finance Printing Bureau and issuing it as legal tender
through the banking system.)
Here's what to
worry about.
Prime Minister Junichiro Koizumi
and members of his economic team want a greater say in
BOJ policy-making. They are moving to more direct
influence over the independent policy-formation
functions of BOJ that are supposed to be protected from
direct political intervention by the government and the
politicians who run it. Heizo Takenaka, the minister of
state for the economy and financial services, bluntly
raised the threat of curbing BOJ's independence in
setting policy that is stipulated with some loopholes
under the new Bank of Japan Law passed in 1998.
Takenaka told a news conference that "the
government should set policy targets and ask for the
Bank of Japan to cooperate", adding: "But the Bank of
Japan should retain its independence in terms of the
measures it uses."
That raised eyebrows.
"This is tantamount to revoking the Bank of
Japan's independence," complains Marshall Gittler, of
Deutsche Bank's Capital Market Research. What it also
raises, he says, is whether such thinking will be the
"litmus test" in selecting a new governor of the Bank of
Japan when Hayami retires in March.
The
government has already stomped with heavy boots over the
issue of what it wants from the next governor, giving
the pre-selection buildup a carnival-like atmosphere. In
recent weeks, Koizumi - with the media in tow - has made
mockery of the central bank and the, well, central
importance of an accepted independent, trustworthy
guardian of money within society.
Koizumi has
done that by blithely confusing the role of the governor
of the Bank of Japan with his own narrow and short-term
political aims. These include victories at local
elections scheduled for this spring and the prospect of
a general election of the Lower House of the Diet
(parliament) later on.
Koizumi needs to
strengthen his control over the factions of the party
that have opposed him in bitter battles over such issues
as cutting back on public spending for road construction
and privatizing the postal system. He gained control of
the prime minister's post when he beat other ruling
Liberal Democratic Party (LDP) candidates in April 2001,
riding a wave of popular support. His ambition is to
remain in office long enough to pursue an ambitious
reform-driven agenda for the government and in the
private sector.
As far as the BOJ governor's job
goes, Koizumi has indicated that he considers a strong
anti-deflationist should be selected. This is a position
that he holds more for political reasons - it is popular
in the media and his own LDP, while nobody really sees
any effective fixes for deflation except better
government policies, such as those that do not cater to
special-interest groups such as construction and
agriculture.
That leaves just about all the
half-dozen of so candidates mentioned in the press
qualified as anti-deflation people. Only one will get
the nod from the prime minister and the cabinet. Both
houses of the Diet then must approve nomination. Hayami
is a strong anti-deflation person, but he stops short -
in principle - of the idea of setting an inflation
target, which he sees as useless as long as deflation
continues to push prices down. Whether Hayami has a shot
at a second term is anyone's guess.
Confucius
would no doubt like the part about his stance on a
matter of principle.
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