March 23rd, 2008Political Deadlock Hurting Japan’s Economic Outlook
On Tuesday of last week, the Japanese government nominated Koji Tanami for the post of governor at the Bank of Japan. The initial market reaction was one of surprise, considering the recent impasse within the Parliament. So it was no surprise when the Upper House rejected the nomination for this potential governor.
The selection of Tanami, a former vice finance minister, had drawn strong criticism from the opposition party members who have repeatedly said they want to see a clear seperation between the Bank of Japan and government policies. On top of this, the man’s ability to lead the central bank was called into question as he lacked experience in monetary policy.
That said, who in this country actually has a reasonable amount of experience in monetary policy and has not at one time worked for the Japanese government? The ranks of power in this country have been comprised of the extremely priveleged for the last 4,000 years and anyone who is actually qualified for the role of central bank governor has long had tied, connections or past dealings with the men’s club that is the Japanese Parliament.
First Time Since 1945
What concerns me the most about this political deadlock, though, isn’t just the fact that the Bank of Japan will be operating without a leader, as fiscal policy can’t change too much during times of financial turbulence. Instead I’m concerned about the reaction of the international money movers.
The fact that the Japanese government can’t agree on something as simple as a properly qualified individual to run an integral organization is showing the world that Japan can’t decide on anything of importance. Given the current turmoil in Asia and the United States, how can any party in the Parliament actually think this back and forth between the Upper and Lower Houses is good for the nation’s interests?
The vacuum at the central bank will seriously affect investor confidence as people will see that this country has no real political power. With the majority of investment in the Tokyo stock market coming from outside the country since 2002, it would be financial suicide to give investors any reason to take their money elsewhere. Just because the Japanese government can’t help but follow America’s lead on most matters doesn’t mean that they should let the economy stall and deteriorate just as horrendously as it’s happened overseas.
The only saving grace the politicians have right now is the amount of action central banks can perform during times of economic instability. With all the problems in the world markets, and the global ripple effect currently taking place, the Bank of Japan’s monetary policy is severely limited, regardless of who is at (or not at) the helm.
What do you think of the Japanese government’s inability to accomplish any of its goals without resorting to technicalities or defaults? Should the “leadership” in both houses be evicted and replaced with a group of people that understand Japan’s declining role in the international community and the importance of mutually beneficial politicking?
Nice post, I enjoyed it. Wish more people were writing on this stuff in Japan!
how can any party in the Parliament actually think this back and forth between the Upper and Lower Houses is good for the nation’s interests?
The vacuum at the central bank will seriously affect investor confidence as people will see that this country has no real political power.
Hmm…I’m of the opinion that this could be a long-term positive for Japan. Investors do not exactly feel confident with the LDP - especially once Abe came in, and as you point out, they now see that Fukuda has no power.
The 1955 system isn’t going to work. It has to change. The next Upper House election isn’t until 2010, and that won’t give power back to the LDP. Even if the LDP does get it back, we’re looking at 2013 - and that would mean that the LDP has to win back the trust of enough voters.
Can Japan stand five more years of this?
Big time international investors and players know that the top BOJ job is not really all that relevant. The position is a golden parachute and most shots are called by the Ministry of Finance in consultation with the Council on Economic and Fiscal Policy. But I think you’re right - in an era with such a weakened ruling political party, how much worse do they want to appear?
Great point about the BOJ not having much power or ability to do anything now anyway. But they do need someone to go to the G7 meetings next month to frown, look concerned and ask questions. I doubt that an interim Governor will be allowed to attend.