Still waiting to see when Muto will be named as next Bank of Japan Governor

February 22, 2008
By Ken Worsley

Last June, we speculated that former Ministry of Finance Vice Minister and current Deputy Governor of the Bank of Japan Toshiro Muto would be the prime candidate to succeed current BOJ governor Toshihiko Fukui, whose term ends on March 19 (ie, real soon).

Then the Upper House election happened in July, and Muto’s candidacy seemed less clear, or at least seemed to be more of a potential political football. With the opposition Democratic Party of Japan gaining control of the Upper House, any LDP-favored candidate was no longer a certain shoe-in for the job. By law, both houses must approve any candidate for the top position at the Bank of Japan, and both parties appear to be looking for political leverage in the discussions.

At any rate, it had been rumored that a successor to Mr Fukui would be named by the end of this week, but then the Nikkei said on Tuesday that the appointment will not come until early next week, which leads us to believe that some backroom dealing is still going on. After all, who else could they seriously be considering at this point?

The major publicly stated DPJ opposition to Muto’s appointment appears to be concerned with his former position as a Vice Minister in the Ministry of Finance. In their view, this represents a conflict of interest, since the DPJ contends that his appointment would violate the principle of separating fiscal management from monetary policy.

This, of course, is debatable, and sounds more political than anything else. After all, Mr Muto would hardly be the first Governor of the Bank of Japan to have spent time working high up at the Ministry of Finance (until the end of the last decade, the BOJ and MOF basically took turns in sending former bureaucrats over to run the BOJ). It thus seems to this observer that should the DPJ be looking for another candidate, there simply is not enough time to get someone else in the door, especially if that person were to come from the private sector.

As Jun Okumura recently put it over at Global Talk 21:

[Muto’s appointment is] a done deal, even if they don’t realize it yet. There’s little more than a month to go, so it’s too late to come up with an alternative. No serious bank is going to cough up its successful president at short notice to assume the top spot at BOJ. The best it could do would be to offer its chairman － largely a ceremonial post － or a vice-president who is slated to be on the way out anyway. That is not a good message to be sent to the market.

I have a feeling that they (the DPJ) do realize it now. Mr Okumura’s piece was written on February 10, and the passage of twelve days since that time only solidifies his position. In other words, we’re waiting for the backroom concessions to be ironed out. What will the DPJ demand in return for going along with Mr Muto’s appointment? Do they have a position to negotiate from? Surely, no one in the DPJ wants to make Japan look bad by delaying the appointment of an obviously qualified man to such a significant and internationally visible position - or does Ichiro Ozawa think he can play this into a situation where the LDP’s current leadership can be made to look weak just before this summer’s G8 summit in Hokkaido?

Filed Under Bank of Japan, Finance, Politics