What’s next for the BOJ? Who’s next for the BOJ?

April 6, 2007
By Ken Worsley

On the heels of the previous post concerning the weak yen, there is also news today on the persistent uncertainty felt amongst Japanese firms over what direction the Bank of Japan will take in the coming year. We already know full well that the Bank of Japan’s most recent Tankan survey showed a slight decline in confidence amongst Japan’s large manufacturers. Is it possible that this pessimism was a hangover from recent volatility in global equity markets and since has dissipated? Or, do senior managers have future stability on their minds? As the Asia Times points out:

Japan’s financial markets are abuzz with two questions: How many more times will the Bank of Japan (BOJ) raise interest rates before its governor, Toshihiko Fukui, almost certainly steps down in a year’s time, and then who will step into his shoes…

…February’s hike in the overnight call rate marked the first time since September 1998 that the key policy rate had been set at 0.5% or higher. But the 0.5% rate is still unusually low by international standards. Fukui has repeatedly cited the dangers of keeping an ultra-easy monetary policy for too long and emphasized the need to carry out phased, small-margin interest-rate hikes to achieve sustained economic growth in the medium and long terms.

The BOJ has been cautious, and will probably be so for a while, about rate hikes, however, as personal consumption - a main engine of growth accounting for about 55% of the nation’s gross domestic product - remains weaker than expected, and prices have failed to rise as much as expected in recent months.

Solid points. It is true that Mr Fukui is almost certain to step down by the end of this financial year, and much will depend on who his successor will be. We should also bear in mind that the Cabinet Office has not yet declared an end to deflation.

As the Yomiuri Shimbun points out, it is still too early to judge whether this economic expansion will permanently bring Japan out of deflation, and it is certainly too early to say that consumer prices will undoubtedly rise - and with real wages not rising in any significant way, but property values rising in urban areas - not to mention the possibility of a hike in the consumption tax after the July Upper House elections, what will households be able to purchase at higher prices anyway?

Back to the BOJ: One name being tossed around as a potential successor for Mr Fukui is none other than Heizo Takenaka.

Filed Under Bank of Japan, Consumer Spending, Interest Rates