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April 1, 2008

BOJ Fiasco Reveals Painful Truths about Politics in Japan

Rooted in long-held assumption of unending LDP rule, central bank void stems from complacency, lack of foresight; media not free of blame

Masahiko ISHIZUKA (Councilor for the Foreign Press Center Japan and a Lecturer at Waseda University)

As Japan has entered an unprecedented period - after World War II at least - without a head for its central bank, the domestic media are describing the country as if it were a "failed state." It may be so, as the government's failure to appoint a Bank of Japan governor to succeed Toshihiko Fukui when his term expired on March 19 could not have come at the worse time, with the turbulence in world credit markets and concern over its impact on the global economy growing more ominous each day.

Prospects for Japan's economic growth look just as precarious as in other industrialized countries, and the void at the top post of the central bank is being perceived as particularly worrying. Always conscious of how the country looks to the outside world, commentators and editorialists are calling the situation a "disgrace," an "embarrassment" or a "shame" internationally.

"Failure of politics" is a popular phrase making headlines, and it is fashionable to blame the blunder on the system rather than to hold particular politicians responsible. The nation has simply been driven into this situation because the government's nominee for the post was voted down, twice, in the upper house controlled by opposition forces.

By law, the governor must be approved by both houses of the Diet. Unlike other bills, the lower house, which happens to be controlled by the ruling parties, does not possess superiority over the upper house in legislative power on the appointment of the central bank chief. Nor is there a stipulation to allow an incumbent to continue beyond the expiration of his term until a successor is appointed (as in the U.S.).

Such a system has been in place for 10 years, since the revised Bank of Japan Law was passed on April 1, 1998. In hindsight, what has happened now is a possibility the government should have been aware of, and a contingency plan should have been prepared.

Who'd have thought?
The main question is why few, not least of which the media, have ever raised the issue or imagined what might happen until it became a troubling reality. Herein lies the problem of the Japanese political system, and democracy, which have been exercised on the almost unquestioned assumption that the Liberal Democratic Party's rule would be unending. That is why, when the new Bank of Japan Law was put in place, nobody was imaginative enough to conceive the divided parliament that has since come to fruition. This political climate of continuous momentum is proving to be dangerous, all the more because people are so used to it that it has a numbing effect.

This is a legacy of the so-called 1955 system, in which Japan's postwar political setup was reorganized into forces represented by what is today's LDP and the now defunct opposition Japan Socialist Party. The 1955 system was a two-party system in disguise, in which change of power was - by tacit agreement between the ruling and opposition camps - virtually ruled out. This perpetuated the LDP's rule, with the opposition forces content to play the role of gadfly, never serious about wresting power away from the ruling camp.

When the government of Prime Minister Junichiro Koizumi captured popularity for his reform drive, he was also said to have eroded the 1955 system as a mechanism of backroom dealings between the ruling and opposition parties. In fact, however, the Koizumi government appears to have reinforced the 1955 system by his landslide victory in the lower house election in 2005.

Then came the devastating defeat for the LDP in the 2007 upper house election, resulting in an unprecedented situation of a divided parliament in which its two houses are under the control of different parties. The current vacuum at the BOJ's top post, which has occurred at an extremely unfortunate time, is basically blamed on the arrogance of the ruling party, which was lackadaisical in paying attention to the changing political climate.

The media are no less critical of the opposition forces - the main opposition Democratic Party of Japan in particular - pressing them to acknowledge their share of responsibility for the central bank mess. There is some truth to the media's allegation as the DPJ, obsessed with grabbing power from the LDP, appears to have taken the central bank governor nomination as a political hostage to hurt the ruling camp. The idea is that this is a matter that should be kept above such political confrontation and horse trading.

Important lesson
The price of not having a central bank chief at this critical juncture could be dear, and the consequences could be dire for the Japanese economy. But it is also true that this tumultuous event has revealed something that could have gone unquestioned or even unnoticed. For example, it was no secret that Toshiro Muto - BOJ deputy governor, whom the government nominated as the next governor only to be rejected in the upper house - had been groomed for the top post since he joined the bank upon his retirement as vice finance minister. It was as if his appointment was a forgone conclusion, never to be questioned.

As most newspapers argued, Muto might have made a good central bank governor, and it may have been too simplistic and wrong to reject him - as the DPJ and other opposition forces did - only on the grounds of his past finance ministry career. But it is also true that he had undergone little public scrutiny in the past five years as a would-be governor. Nor, it seems, has serious discussion been made about the role of the central bank governor and what kind of person is really qualified for the job.

Given the history of the Finance Ministry's dominance over the BOJ, with many retired top finance officials routinely taking over as the bank's governor, it is not at all irrelevant to take a skeptical look at Muto - or any other candidate from the ministry - and have a deep discussion on the relationship between fiscal policy and the central bank.

That is largely a role the media should play, and they have failed. Under time pressure as the expiration of Fukui's governorship approached day by day, editorial comments urged that Muto should be endorsed and that, as he seemed well-qualified and there was no alternative, it was irresponsible for the opposition to oppose him. The argument would have been persuasive had it been raised much earlier with a view toward convincing the general public, for whose well-being the BOJ governor serves after all.

(Originally appeared in the March 31, 2008 issue of The Nikkei Weekly, reproduced here with permission.)

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