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Japan’s
political establishment has turned even more inward than
usual as it battles over who will run the central bank.
It may be better off looking outside the system.
In such
a seniority-based business culture, it comes as no
surprise candidates for Bank of Japan (BOJ) governor
have been around a long time. The first casualty of
politicians’ bickering was Toshiro Muto, who began at
the Ministry of Finance in 1966.
Koji
Tanami, also rejected by lawmakers last week, arrived at
the Finance Ministry in 1964. Masaaki Shirakawa, who was
named acting BOJ chief, has 34 years of central bank
experience. In Japanese economic circles, that makes
Shirakawa a relative newcomer.
Now the
search is on for a full-time replacement for Toshihiko
Fukui, whose term expired on March 19. With the global
economy in turmoil, lawmakers hopefully realize how bad
it looks to have the top of the BOJ in a state of flux,
if not farce.
The real
problem may be that Japan is looking for a BOJ chief
among the usual candidates, and that just won’t do.
Economists who’ve spent decades at the central bank or
the Finance Ministry tend to get homogenized
intellectually. Fresh thinking is rewarded less than the
number of years spent in the system.
What’s
needed is someone from outside, well, “The Matrix,” or
at least Japan’s financial version of it. The premise of
the science-fiction film trilogy—humans living in a
simulated reality created by machines to pacify and
subdue the human population—always stuck some observers
as a bit Japan-like.
Japan’s
Matrix
No,
Japan’s 127 million don’t live in The Matrix, though
policymaking often seems to. Where else can a central
bank that effectively has zero interest rates claim it’s
independent? Where else can politicians build up the
world’s biggest public debt and avoid the consequences?
All this
is possible because of Japan’s wealth and the
sophistication of its financial model. Yet, here’s the
rub. If a nation’s responsibility to create a high
standard of living, offer top-notch services and decent
air quality,
Japan
is a remarkable success. As an investment destination?
Not so much.
As the
world slides toward recession, speculation is growing
that the BOJ will soon lower its benchmark lending rate
from 0.5 percent. Given how aggressively the Federal
Reserve is cutting US rates, it will be very difficult
for Shirakawa to resist political pressure to ease.
Looking
ahead, though,
Japan
needs a policymaker to help break the economy out of The
Matrix. Someone like Paul Volcker, perhaps.
Volcker’s example
Volcker
faced 14-percent inflation and 15-percent bond yields
when he was named Federal Reserve chairman in 1979.
Using some unconventional policies—essentially targeting
money supply—Volcker brought consumer prices down to 4
percent by the time he left the Fed in 1987.
Japan’s
challenge is quite different: Moving rates away from
zero without killing the economy. Yet, the independence
Volcker exercised in the face of extreme pressure from
politicians and the unusual tactics he employed remain a
fascination for economists to this day.
Volcker
wasn’t exactly an outsider. He had worked for either the
Fed or the US Treasury on and off for 27 years. In 1965
he left the Treasury for a job at Chase Manhattan Bank.
Volcker returned to the Treasury in 1969 and in 1975
became president of the Fed Bank of
New York.
As
Volcker told me a few years back, those four years back
in the private sector gave him a fresh perspective on
how policymakers should stabilize economies.
BOJ
tussle
The
Finance Ministry and the BOJ boast many smart officials.
Yet, it’s hard not to wonder if
Japan
should look for a less doctrinaire central banker.
Japan
needs someone with an independent streak, the
intellectual constitution to weather criticism and fresh
ideas.
There’s
growing angst over Prime Minister Yasuo Fukuda’s failure
to replace Fukui and opposition lawmakers playing
politics with the BOJ. The bigger question is when
Japan will allow the BOJ to do its job.
Fukui failed because he tried to do the impossible:
simultaneously end deflation and normalize interest
rates. He should have picked one of those goals and
pursued it.
The
800-pound gorilla in the room complicating the BOJ’s job
is debt. Japan’s debt is at least 150 percent of gross
domestic product, which explains why politicians go
ballistic when the BOJ tries to move rates away from
zero.
Normalcy
needed
The BOJ
enables the government in its highly indebted state, and
that’s the way politicians want it. There’s no serious
discussion of reducing debt because, with 10-year bond
yields at 1.3 percent, it seems manageable for now.
Every BOJ rate hike makes the debt less manageable,
something politicians remind the central banker of
daily.
Japan
won’t grow at its potential until normalcy returns to
its monetary and fiscal policies. With no protests in
the street, politicians have little reason to change
their ways.
Giving
Japan’s rapidly aging population, few issues are more
critical than reducing debt. If the BOJ had a maverick
at the helm, politicians would find it harder to borrow.
And Japan would have a better chance of breaking out of
The Matrix. |
