INSIGHT-Japan PM's push for radical BOJ head meets resistance

Thu Feb 7, 2013 12:32am EST

By Leika Kihara
    TOKYO, Feb 7 (Reuters) - The Japanese prime minister's push
for a governor who will lead a radical policy shake up at the
Bank of Japan is meeting resistance from his own cabinet and
financial bureaucrats, who fear extreme measures from the
central bank may trigger a damaging rise in bond yields.
    That tussle is testing Shinzo Abe's resolve to push through
with his pledge for an overhaul of the monetary policies that
have so far failed to jump start Japan from years of economic
malaise.
    The delicate political maneuvering needed to ensure
parliamentary approval could mean that Abe may have to settle
for someone who is not his first choice, officials close to Abe
and those involved in the selection process say.
    "Abe will have the final word. Still, it will be a close
call with a lot of complexities involved," said a government
official with knowledge of the negotiations.
    It is virtually a given that whoever takes over in coming
weeks as head of the Bank of Japan will pursue monetary easing
with more vigour than outgoing governor Masaaki Shirakawa.
Having cut interest rates almost to zero, the BOJ has adopted
policies that inject cash into the economy.
    At stake is how far the new BOJ chief will be prepared to
push the central bank into untested policy waters in answer
Abe's call for an all-out assault to break Japan out of years of
grinding deflation and its fourth recession since 2000.
 
 
    
    BALANCING ACT
    In the bureaucrats' corner is Toshiro Muto, 69, a former
top-level financial official expected to push harder on the gas
pedal than Shirakawa but to watch out for potential potholes and
speed bumps.
    He advocates the BOJ buying more longer-dated government
bonds and expanding asset purchases more aggressively. But he
has also warned that printing money to finance public debt could
backfire and trigger a sharp bond yield spike. 
    That could significantly add to Japan's public debt burden,
already the highest in the industrialised world at more than
twice the size of the economy.
    For the former top finance ministry bureaucrat and BOJ
deputy governor, it is the second chance to land the top job at
the central bank. His candidacy was struck down in parliament
five years ago, allowing Shirakawa to come in as a compromise
candidate.
    In Abe's corner, there is a small group of hopefuls
advocating unorthodox and sometimes controversial steps, such as
buying foreign bonds and more risky assets, to help Japan's new
leader make good on his pledge to revive the stagnant economy
with powerful monetary and fiscal stimulus.
    Asian Development Bank President Haruhiko Kuroda, 68, is a
vocal critic of Shirakawa's BOJ policies and a frontrunner in
Abe's camp pushing for a revamp of the central bank's policies.
    Kuroda ticks most of the boxes on the ruling and opposition
parties' wish list. That is important because whoever Abe's
government picks will need approval from both houses of
parliament, including the upper chamber where Abe's Liberal
Democratic Party (LDP) and its small ally lack a majority.
    Kuroda, who was Japan's top currency diplomat in the wake of
the Asian financial crisis in the late 1990s, has management,
markets and international expertise. He is a fluent English
speaker with a network of global contacts.
    
    ABE'S MOMENTUM
    It is up to Abe and his cabinet to put forward a candidate
to replace Shirakawa and his two deputies on the nine person
board. That is expected by the end of this month.
    Abe told parliament on Thursday the new BOJ governor must be
able to communicate Tokyo's policy stance to the global
community, a sign he may be favouring someone like Kuroda.
    The headhunting gained momentum on Tuesday after Shirakawa
said he would leave on March 19, three weeks before the end of
his term, to synchronise his departure with that of his
deputies.
    The news drove the yen down to its lowest level against the
dollar since May 2010 as markets brought forward the anticipated
timing of more aggressive easing under a new BOJ leadership.
    The yen's retreat from record highs scaled in the past two
years has already offered welcome relief to Japanese exporters
and a rally in the Tokyo stock market, which closed on Wednesday
at its highest level in more than four years.
    Shares in Toyota Motor Corp hit a four-year high
after the automaker lifted its annual profit guidance, partly
because of the weakening yen.
    Abe is keen to maintain the momentum behind his economic
prescription - dubbed "Abenomics" - and appointing an outsider
with unorthodox ideas could accomplish that.
    Kuroda, who calls on the BOJ to buy more risky assets, or
academics Kikuo Iwata and Takatoshi Ito, among the BOJ's
harshest critics and advocates of a rapid expansion of the
central bank's balance sheet, fit the bill.
    "Abe has said he wants someone who can drive the BOJ into
taking unprecedented policy steps. It wouldn't make sense for
him to choose an ex-bureaucrat," said another source.
    
    IN MUTO'S FAVOUR
    Still, several factors seem to act in Muto's favour.
    First, alarmed by the radical views of Abe's favourites, BOJ
and Ministry of Finance bureaucrats have set aside their
differences and have been lobbying together for someone like
Muto, who could be relied on to avoid anything that could
jeopardise financial market stability, sources with knowledge of
the negotiations said.
    Secondly, not everyone in Abe's cabinet and the LDP is as
hell-bent on shaking things up at the BOJ as some of his close
aides, they said.
    Finance Minister Taro Aso, though close to Abe, sides with
the bureaucrats in suggesting an academic would not be suitable
for the top BOJ job that requires strong management skills.
    His ministry will be compiling a short list of candidates
and Aso, who picked Shirakawa when he was prime minister, will
have a strong say in who gets the final nod, people familiar
with the selection process say. Muto has long-standing ties with
many LDP lawmakers and is well regarded in the party that
nominated him for governor in 2008.
    The fact that Kuroda began a second five-year term at the
ADB in November 2011 is also acting in Muto's favour because
Japan is worried that if Kuroda vacated the position early, it
could lose the post to China.
    Finally, while all political parties want the BOJ under the
new leadership to crank up the yen printing presses, they can
hardly agree on what an ideal candidate should be like.
    While some, including conservative LDP lawmakers, say they
want an experienced and internationally well-connected manager,
others, such as Yoshimi Watanabe, head of the small Your Party,
rules out backing a former finance ministry bureaucrat who would
bring more of the same.
    
    DARK HORSES
    To get his candidates approved in the upper house, Abe needs
votes of the opposition Democratic Party of Japan or, failing
that, a combination of votes from smaller parties.
    The divergence of views among the parties limits chances of
dark horses like Kikuo Iwata and Ito winning the nomination,
though they could land the deputy governor posts, analysts say.
    "I don't think dark horse candidates will get approved by
parliament. I think the government will play it safe this time
and try not to disrupt markets," said Hideo Kumano, chief
economist at Dai-ichi Life Research Institute in Tokyo.
    The LDP has said it wants to get the Democrats' consent. The
party, ousted by Abe's conservatives in December's election, has
said it would not turn the governor's choice into a political
football.
    The Democrats, who blocked Muto's nomination in 2008 arguing
that bringing in a former finance ministry official could
compromise the BOJ's independence, now say they do not rule out
ex-bureaucrats. In fact, they say they will not back someone who
treats monetary easing as a cure-all. That seems to favour Muto
over Abe's favoured academics.
    If the LDP failed to secure the Democrats' backing or find a
common ground with the smaller parties, the government could try
former deputy BOJ Governor Kazumasa Iwata, who now heads a
private think tank, as a compromise candidate.
    Iwata has repeatedly called on the BOJ to consider buying
foreign bonds to help keep yen rises in check, a view that won
him fans among political circles but is certain to draw
criticism from Japan's Group of Seven partners as indirect
currency intervention to weaken the yen.
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