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New Bank of Japan Chief Faces Challenge
[Analysis] Masaaki Shirakwa takes the helm of Japan's central bank amid economic uncertainties
Hisane Masaki (hmasaki)     Print Article 
Published 2008-04-11 09:10 (KST)   

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Japan Appoints New BoJ Head

Masaaki Shirakawa took office as new Bank of Japan (BoJ) governor on Wednesday, at a time when the Japanese economy is teetering on the brink of a recession amid a stronger yen, spikes in prices for oil and other raw materials, and declining corporate capital investment.

There are also persistent concerns about a possible prolonged recession in the United States and unstable global financial markets, both triggered by the US subprime mortgage crisis.

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With Japan dependent on exports for growth, a higher value of the yen, which makes Japanese products more expensive on overseas markets, and an economic downturn in the US, Japan's largest export market, both hurt the Japanese economy.

On March 19, the day Shirakawa셲 predecessor Toshihiko Fukui stepped down as BoJ chief, the government downgraded its assessment of the economy for the second consecutive month. Economic and Fiscal Policy Minister Hiroko Ota said at the time that the nation's longest postwar recovery, which started in February 2002, has hit a soft patch, or temporary lull, for the third time.

Ota said on Tuesday that that there is no change in her view that the economy is in a soft patch. Her comments came a day after the government said Japan's diffusion index of coincident economic indicators stayed below the boom-or-bust line of 50 percent in February for the second straight month.

On April 1, the BoJ released a closely watched tankan quarterly survey showing that confidence at leading Japanese manufacturers worsened to its lowest in more than four years. The survey also showed large Japanese companies plan to cut business investment by 1.6 percent in fiscal 2008, which began on April 1.

At its two-day policy board meeting that ended on Wednesday, the BoJ, in a widely expected move, kept interest rates on hold amid mounting concerns over the outlook for the global, as well as Japanese, economy and international financial markets. The BoJ kept the unsecured overnight call rate - which the BoJ uses as the key target rate in the short-term money market - at 0.5 percent.

Shirakawa chaired the latest policy board meeting for the first time, but in his capacity as acting BoJ governor because he was formally promoted to governor after the meeting ended. With the BoJ's top post still vacant during the meeting, seven members of the normally nine-member policy board made its Wednesday decision unanimously.

The BoJ itself also downgraded its view on the Japanese economy as well as its outlook on Wednesday, dropping a phrase used in recent reports that it was on a moderate expansion trend. "Japan's economic growth is slowing mainly due to the effects of high energy and materials prices," the central bank said in a report issued after the two-day policy board meeting ended. As for the outlook, the report said, "Japan's economy is expected to grow at a slower pace for the time being and follow a moderate growth path thereafter."

When Fukui took the reins at the Japanese central bank in March 2003, short-term interest rates were zero. In March 2006, the BoJ scrapped its five-year-old "quantitative easing" policy and returned to a more conventional regime of using as a monetary adjustment target the unsecured overnight call rate rather than the outstanding balance of current-account deposits held by private financial institutions at the central bank.

It was the first time in about 15 years, except for a brief period from the summer of 2000 to early 2001 in which the BoJ hastily lifted the zero-interest rate policy, that the central bank had reversed its policy to one of tightening. The quantitative easing policy was aimed at defeating deflation, which long plagued the Japanese economy by depressing corporate earnings and wages. Under the quantitative easing policy, which the BoJ introduced in March 2001, the bank flooded the nation's financial markets with excess cash in the hope of encouraging borrowing and lending, while anchoring short-term interest rates at near zero.

In July 2006, the BoJ ended its near six-year zero-interest policy as the Japanese economy gained strength after a decade in the doldrums, lifting the target for the unsecured overnight call rate to 0.25 percent from in effect zero and the official discount rate to 0.4 percent from 0.1 percent per annum.

In February 2007, the BoJ raised rates by a quarter percentage point again to 0.5 percent, in an attempt to rectify what the central bank itself views as the "abnormal" state of the credit policy. The official discount rate - which serves in effect as the cap on the overnight interbank rate because the BoJ provides loans to banks at the rate through its Lombard-type lending facility - was jacked up to 0.75 percent from 0.4 percent.

As governor, Fukui repeatedly warned of the dangers of keeping a very loose monetary policy. But the nation's interest rates, still quite low by international standards, have been left on hold at 0.5 percent for more than one year amid growing concerns about the health of the economy.

While many analysts expect Shirakawa to pursue a similar policy to his predecessor and the BoJ to take a wait-and-see attitude by keeping interest rates steady this year, others predict a cut in rates in the near term as the uncertainty over the economy is growing.

In his confirmation hearing at the Diet, Japan셲 parliament, on Tuesday, Shirakawa apparently tried to avoid committing himself about rates. He said the bank has no preconceptions about policy and will "closely examine both upside and downside risks". Noting that the outlook for the Japanese economy is "full of uncertainty", he reiterated that the bank is ready to take "flexible action". But at the same time he said that it can take one to two years before the effect of policy emerges and that the BoJ needs to take longer-term risks into account.
Hisane Masaki is a Tokyo-based journalist, commentator and scholar on international politics and economy. This is the second part of an article that originally appeared on Asia Times.
©2008 OhmyNews
Other articles by reporter Hisane Masaki

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