| |
FOLLOW
THE YEN
Part 1:
BOJ's five-year itch
By Richard
Hanson
"During the past five years, we have
been exploring what a central bank can and cannot do in
order to get Japan's economy back on track. In exploring
the boundary between what a central bank can and cannot
do, we have tried to find the right boundary by not
being shackled by precedents, thinking hard, and acting
with courage." - From Masaru Hayami's "last speech" as
governor of the Bank of Japan (February 25)
TOKYO - The Bank of Japan (BOJ) governor-hunting
season opened early. By December, which was cold and
snowy, pundits and other Bank of Japan watchers had
begun the competition to guess the next governor of the
central bank. With the coming of the new year, distinct
factions had formed. There were candidates in the State
Minister Heizo Takenaka camp. "I want the individual to
be bold and daring about increasing money supply,"
Takenaka said. "The individual should be innovative and
have a strong attitude toward reform." Prime Minister
Junichiro Koizumi kept his counsel.
This was the
litmus test for someone who would be unlike the outgoing
governor Masaru Hayami, who came out against using
monetary policy to bolster the economy in the place of
fiscal policy. Several names were raised. What it meant
was someone who would fight the devil of deflation by
all means. Targeting an inflation rate for the economy
became the rallying point for what became the
anti-Hayami force, despite the 77-year-old curmudgeon's
lame-duck status.
As time went on, a strong
lobby emerged from the business world and from within
the government and Bank of Japan old boys for Toshihiko
Fukui, who was considered by reformers no better for the
sake of the nation than Hayami himself. In truth, they
did almost sound alike when prompted on the issues.
This is as good as any explanation why last week
Koizumi revealed his choice of Fukui, 67, to succeed
Hayami. It also opened up a rather odd reaction in some
sectors of the press and among BOJ watchers, at least
those who got their speculation wrong.
One
common theme was that Koizumi has abandoned or weakened
his claim to be Japan's Mr Reform (his claim was
actually to be Mr "Structural Reform") in leading the
nation out of its rather multifaceted and economic
malaise. The overseas press was notably strong on this
theme of betraying reform after news of Fukui's
selection was known. Hayami was gratuitously pilloried.
"Many" saw Koizumi's decision as "a vote for the
status quo and a missed opportunity to shake Japan's
economy out of its 12-year slumber", said the Wall
Street Journal. London's Financial Times cited critics
who "question Mr Koizumi's qualifications as a reformer
and Japan's commitment to tackle deflation".
The
New York Times, while showing sympathy for some things
the old governor did while five years in office,
concluded: "But just about everyone agrees on one point:
Masaru Hayami failed as governor of the Bank of Japan."
Fukui was subjected to personal barbs in the press for
matters that arose while he was a rising star in the
Bank of Japan.
Koizumi did have the final say,
however. Fukui will have little trouble being approved
by both houses of the Diet (parliament) to take over
officially on March 20. That settled the question of
whether Koizumi would chose a radically different
governor - favoring a bolder scheme to fight deflation -
or one who would be more in line with governor Hayami
and others in the Bank.
Hayami quickly cleared
the decks for Fukui with what he called his "last speech
as governor", titled "Towards a Sustainable Growth
Path", in which he cautioned that there does not seem to
exist "any magic recipe for bringing Japan's economy
back on to a sustainable growth path". Even so, Hayami
was clear that under his watch BOJ did indeed press the
boundaries of what a central bank could do "by not being
shackled by precedents, thinking hard, and acting with
courage".
For governor-select Fukui, the words
of Hayami's speech were poignant. But for an
unprecedented incident five years ago in March 1998,
that sayonara speech might very well have been
delivered by Fukui himself. At the time, as the senior
deputy governor of the BOJ, Fukui was considered a
shoo-in to take over the reins of power at the central
bank after BOJ was struck by the worst scandal in its
history on Wednesday, March 11, 1998.
On that
morning, without warning, a phalanx of Public
Prosecutors pounced on the central bank's fortress-like
headquarters in central Tokyo. It was a raid.
The prosecutors arrested a senior BOJ official:
the 42-year-old chief of the Capital Markets Division
named Yasuyuki Yoshizawa. In western Japan, the Bank of
Japan's Osaka Branch was also raided. Yoshizawa was
accused of taking several million yen in bribes from two
very large banks (both now merged into new banks) in
return for providing secret bank documents. Other crimes
were suspected involving a slew of other financial
institutions. The banks provided lavish entertainment
and other favors. In return, the official passed on
secret documents and information.
This was a
devastating blow. Before it was over, another senior
official had committed suicide and more than 100 BOJ
officials were singled out for punishment. It was the
first time that a BOJ official had been arrested since
the central bank's founding in 1882.
And it was
its first time to be subjected to a raid from outside
authorities. (In September 1945, the just-landed
Occupation forces staged a snap midnight raid on BOJ to
seize assets of war-related special banks that were to
be shut down, but had to return during business hours
because no one could find the key to the door.)
Governor Yasuo Matsushita (a former top Finance
Ministry official) resigned. The volatile prime minister
Ryutaro Hashimoto was livid at the news of the central
bank's scandal. That January he had cleared up a much
worse scandal at the Ministry of Finance (MOF) in which
his finance minister and the senior vice minister
resigned to take responsibility.
Hashimoto was
already angry at his economic advisors at MOF and BOJ
for failing to foresee a collapse in economic growth
that would soon cost him the prime minister's post after
a disastrous election showing by the ruling Liberal
Democratic Party (LDP) the following July.
At
BOJ, deputy governor Fukui was considered the most
suitable candidate to take over. Fukui had fought hard
to prepare the new BOJ Law that was to take effect on
April 1, weakening MOF's influence over the central
bank. A graduate of Tokyo University (Hayami was
Hitotsubashi U), Fukui had been groomed over four
decades in the cloistered world of central banking,
earning the nickname of "Prince" inside the bank.
Prime minister Hashimoto acted quickly, ignoring
pleas on Fukui's behalf that he should be named as
governor. "Hashimoto had to get someone from outside the
bureaucracy," said an official at the time. Hashimoto
could not select a MOF official. He picked Masaru
Hayami's name from a short list drawn up by his staff.
Hayami was known widely for his cleaning up of a scandal
at the trading company he joined, not for his 34 years
before that as a BOJ official.
"Fukui is
politically well connected, with lots of contacts in the
Diet," said a BOJ official at the time. If Hayami, then
72, was appointed it was assumed by some that he would
not serve a full five-year term, giving Fukui a chance
to be "cleansed" by resigning on his own initiative. So
Fukui resigned. In his place came Sakuya Fujiwara, the
first journalist ever named to such a post. Fujiwara had
long covered BOJ for Jiji Press. The other deputy named
was a BOJ executive director, Yutaka Yamaguchi, a
brilliant if somewhat aloof thinker. The three top
officials shared a reputation of being "clean" in a very
dirty world.
Seemingly out of the blue, prime
minister Hashimoto speedily chose the well-known
business figure of Masaru Hayami to be governor. His job
was to clean up the mess left by the scandals. He did
his job.
The popular press characterized him as
an "outsider" sent in to straighten out the Bank. This
was a misleading impression, since he retired from BOJ
in 1981. After rising to be chairman of the Nissho-Iwai,
he served as chairman of the Japanese Association of
Corporate Executives (Keizai Doyukai). He favored a
strong yen (having written a book on the topic) and was
dismayed by the central bank's monetary policies. These
were views that he continued to hold as governor.
In retrospect, Fukui was lucky to have been
spurned by prime minister Hashimoto, whose time in
office was to be limited. He avoided blame for anything
that took place not on his watch, though he probably has
very little to quarrel about with many of those
policies. Hayami fit the bill, said Hashimoto as he
announced the appointment as the "best person who can
restore confidence in the scandal-tainted bank".
What are his prospects?
As the dust
settles, Fukui does begin to look more like the best
person available to implement the policies that Koizumi
needs to act upon. Koizumi is certainly concerned about
such issues as deflation. But no one seems to have a
clear idea as to how it can be controlled.
Koizumi, as prime minister, has a clear
political agenda. He faces a re-election battle in
September to remain president of the Liberal Democratic
Party (LDP) in order to remain in the prime minister's
official residence.
The prime minister will
celebrate his second year in office next month. At the
moment, the popularity polls show reasonable levels of
support (just under 50 percent). He is still focused on
his agenda of "structural" economic reform within the
government and private sector.
The appointments
that he is making at the Bank of Japan clearly are aimed
at bolstering his ability to form and implement those
policies. That is evident in his choice for the two
deputy-governor positions. Both are from outside of the
Bank of Japan.
Kazumasa Iwata, 56, is a
professor from Tokyo University seconded to the Cabinet
Office (with experience in the Economic Planning
Agency). Iwata is best known for his views on being
flexible about tools for coping with deflation. He
maintains active ties with officials overseas. His
duties in the Cabinet Office included drawing up the
monthly economic report and presenting it to the
cabinet.
Whether he is a strong advocate about
such things as targeting a rate of inflation remains to
be seen. But being in the Bank of Japan, where real
decisions on monetary policy have direct impact on
markets, is a more sobering responsibility than debating
untested ideas, such as "inflation targeting", while the
best talent around are badly divided over causes and
solutions.
The selection of the Finance Ministry
veteran Toshiro Muto, 59, directly from his long
two-and-a-half years as MOF's highest-ranking
bureaucrat, is bound to raise eyebrows. Muto has been a
key figure in bolstering the Finance Ministry's
relations with the Prime Minister's Office and other
ministries and agencies in the government.
The
choice of Fukui is good for both the Finance Ministry
and for Prime Minister Koizumi. The prime minister does
not have much interest in the nitty-gritty of fiscal and
monetary matters. As a politician, however, he will not
tolerate the sort of economic disaster that forced his
political arch-enemy out of office five years ago. Two
years ago, Koizumi defeated Hashimoto in the LDP race
that won him the prime minister's job. They remain
bitter rivals.
The murkier struggles are taking
place in the bureaucracy itself. In the past five years
- the number five seems to have significance for many
people - the MOF was stripped of many of its powers and,
in what amounted to a purge, even its old name in
Japanese, the Okurasho. Since Koizumi became prime
minister, MOF has carefully inserted itself into key, if
still junior, Cabinet Office positions and demonstrated
its old talents for influencing policymaking. MOF
retained control over budget, tax and public finance -
with tentacles into all levels of government.
Former prime minister Hashimoto's punishment
five years ago stripped MOF of the functions of
supervision and making policy over financial
institutions and placed them in the new Financial
Services Agency (FSA). At the moment, the FSA and
economic policymaking are under State Minister Heizo
Takenaka.
Bluntly put, MOF is pressing hard to
regain its clout within the government by using its
well-honed skills in allocating budget funds and other
resources in places where it does MOF the good.
Effective coordination of policies among the Prime
Minister's Office, the Bank of Japan and MOF is probably
a worthy cause.
The obvious confrontation points
within the cabinet will be with Takenaka - who at least
indirectly is linked with those who saw Fukui's
ascendancy as a setback for reform thinking.
Koizumi has fought for passage of a genuine
agenda for what he defines as "structural" reforms that
are good for the economy (public and private sector) and
for a more effective government bureaucracy. That was
the bulwark of his campaign when he took office. He most
likely will be using the same strategy as he gears up to
assure himself another term as leader of the LDP next
fall and as one of the longer-serving Japanese prime
ministers in recent history.
In the past few
months, Koizumi has realized that the success or failure
of his grand vision for Japan - "structural" reforms and
all - will depend on the cooperation of those who
control the money or at least understand where the money
is and how to use it. MOF, BOJ and their allies will be
key players in supporting Koizumi's agenda. What MOF has
demonstrated in recent months is that it is still the
master of following where the yen is and how to use it
for its own political advantage.
Next: Policy squad
(©2003 Asia Times
Online Co, Ltd. All rights reserved. Please contact content@atimes.com
for information on our sales and syndication
policies.)
|
| |
|
|
 |
|
