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Yomiuri piece on the Bank of Japan Governor debacle is dead wrong

As everyone who follows Japan’s economy already knows, the Bank of Japan’s top position is currently vacant. The story behind the story is richly complex, and is turning out to be a fascinating saga offering a very helpful glimpse into the current state of Japan’s political machinations. Claus Vistesen recently described the debacle as being “better than Shakespeare.” I like this comparison because it truly is difficult to tell whether we’re watching the unfolding of a tragedy or a comedy. It is the end of the fourth act, and we’re still wondering whether the play will end with everyone dead, the stage covered in blood, or if the curtain closing will bring about some unexpected union of unsuspected soul mates.

With that in mind, today’s Daily Yomiuri printed an article on its front page that we have long been waiting for. This piece, a blatant editorial disguised as analysis placed amongst the news of the day, is so profoundly misguided that we need to break it down and look closely at how the Yomiuri is attempting to manipulate events into its own worldview. Near the opening, the article tells us that the global economy is not currently experiencing the best of times:

…[T]his is a fire of considerable proportions–the dollar has sharply dropped; share prices are hovering at low levels; and crises involving major financial institutions have surfaced in quick succession.

This is all very true. The author, however, seems to be under the illusion that American policymakers have somehow acted laudably in their attempts to fight the “blaze” on the other side of the Pacific:

U.S. financial authorities have started to extinguish the fire in a bare-knuckled fashion, employing both financial and fiscal measures. This was symbolized by U.S. President George W. Bush, who said, “And when need be, we will act decisively,” meaning emergency actions are necessary when an emergency occurs.

On Tuesday, the U.S. Federal Reserve Board cut its federal funds rate for the sixth time since last summer, marking a total reduction of three percentage points.

This is a prime example of “action taken at a time of emergency” and signals the strong U.S. determination and sense of responsibility vital to prevent chain reactions occurring in response to events in the global market.

Yet few pundits in the US agree with this viewpoint. We won’t get into all the reasons for that here, but anyone should recognize that holding up the words of George Bush as an example of solid crisis management is material for the theatre of the absurd.

The author moves on to score easy points by picking the low fruit on the tree:

In the midst of this critical situation, however, an event that should never have come to pass in Japan–the world’s second-largest economy–has been allowed to occur. The post of the Bank of Japan governor, a leader in the international financial cooperation regime, has fallen vacant.

True, this event never should have come to pass, but it did - and we predicted trouble with this nomination back in November. The risk of nominating Mr Muto for the BOJ Governor position should have been clear and obvious to the political leadership of Japan. Perhaps it was, yet they were too arrogant to believe that things could turn out other than the way they wanted. It’s still a bit early to comment on that.

The Yomiuri continues:

One task expected of the Bank of Japan head is to monitor the global financial market situation during the United States’ long night, and until Europe welcomes the morning. And, if necessary, the governor should spearhead emergency measures.

This is again absurd. The BOJ is not going to somehow transform from near irrelevance to the world’s central banking superpower simply because the US needs a pinch runner. The Bank of Japan has no emergency measures at its disposal - it can only lower interest rates by 0.5% before they would enter negative territory (hey, why not?). There has been talk of lowering the rate by 0.25% at April’s Policy Board meeting. Still, this would hardly qualify as an emergency measure; it would simply be a matter of course.

It gets better:

In a sense, the Bank of Japan governor can be dubbed the “duty officer” of the global economy.

Says who? I have a very hard time taking that statement seriously at all. After it, however, we move into the truly obnoxious:

Many former Bank of Japan governors served as symbols of Japan’s financial policies.

(Here it comes)

To name a few, Haruo Maekawa was loved and respected by market officials around the world as “Mike.” Yasushi Mieno was dubbed “Onihei of the Heisei era,” a name taken from the Edo-period detective Hasegawa Heizo who worked in the arson and robbery department in Edo. Mieno established his reputation via his efforts to pursue tight monetary policies to combat the bubble economy.

Maekawa’s central banking prowess apparently rests on the fact that someone once called him “Mike.” The author defeated his own argument with a silly anecdote. Then, the part about Mieno moves things from Shakespeare straight to Moliere: Mieno established his reputation via his efforts to pursue tight monetary policies to combat the bubble economy.

Mr Mieno, having taken his position at the BOJ on December 17, 1989, certainly is not to blame for the bubble itself. His actions following the bursting of the bubble, however, have hardly been without criticism. Here’s what the International Herald Tribune had to say in February 1993, after the BOJ cut interest rates from 3.25% to 2.50%:

Hailed two years ago as the world’s top central banker, Yasushi Mieno of the Bank of Japan has fallen a few notches in the estimation of many economists here. Analysts say he has been too slow in relaxing monetary policy, a mistake that has deepened and prolonged Japan’s recession.

The central bank lowered its discount rate Thursday to 2.50 percent from 3.25, a deep cut that nonetheless came as no surprise, having been leaked onto the front pages of Japanese newspapers earlier in the week. It was the sixth in a series of cuts begun in June 1991, and took the key lending rate to its historic low last seen in 1989.

Critics said the latest cut, the first since last July, was long overdue and would do little by itself to revive the economy.

Of course, those interest rates would later go down to 0%, and the Nikkei has never come anywhere near actually recovering from the bursting of the bubble. Nor has Japan’s economy.

Back to the Yomiuri article. The author goes on to say that a vacancy at the top of the Bank of Japan is “not an option” (even though it clearly is) due to the current slowing of Japan’s economy. The author is sort of correct: a vacancy should not have been an option. The ruling Liberal Democratic Party should have made sure that it put forward a candidate who would be approved by both houses of the Diet, especially when they waited until the last minute to propose Mr Muto, thereby treating the job as if it were an afterthought.

What kind of BOJ Governor is the author looking for?

We need a powerful Bank of Japan governor who can grasp the slippery helm of monetary policy and prevent commodity prices from excessively rising, while maintaining a sustainable economic expansion.

This is frankly stupid. Commodity prices are not only determined in a global marketplace, but central bankers possess absolutely no power to control them.

The author continues by blaming the Democratic Party of Japan for the current situation. While the DPJ may be guilty of playing politics, one may also argue that they are exercising their mandate, which was handed to them by the voters last July. The DPJ is actually taking a stand against the LDP acting unilaterally and stocking unelected positions with members of its old boy network. This is good for Japan, though bad for Mr Muto, who was undoubtedly qualified for the job. The LDP took it away from him by proving that it knows nothing about parliamentary procedure.

Towards the end, the author shows his naiveté:

I wonder about the extent to which the DPJ was aware of the gravity of the leadership vacuum in the central bank.

I don’t. They knew exactly what they were doing. They are forcing the LDP to work with them on putting forth a candidate. The method may be extreme, but they have the mandate and it’s time someone stood up to the LDP. In the long run, this should be good for Japan, and will represent a healthy moment in democracy. The Yomiuri piece reads like an apologist defending a political party that simply doesn’t know how to participate in party politics and democracy. We doubt that will change any time soon.

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