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Wanted: Bank of Japan governor (FT)

Wanted: Bank of Japan governor

Published: March 19 2008 19:21 | Last updated: March 19 2008 19:21

With the minor matter of an international financial crisis to deal with, finding a governor for the Bank of Japan might seem urgent. But the opposition Democratic Party of Japan is right to oppose nominees it sees as too close to the powerful Ministry of Finance. Markets are fragile, and a compromise candidate must be found quickly, but the ideal choice would be an outsider with strong credentials as a macroeconomist.

Yasuo Fukuda, Japan’s prime minister, appears to believe that the same action can lead to a different outcome. After the opposition rejected Toshiro Muto, a law graduate from the University of Tokyo and former career civil servant with the Ministry of Finance, as Bank of Japan governor, Mr Fukuda put forward Koji Tanami, a graduate from the University of Tokyo and former career civil servant with the Ministry of Finance. The DPJ has opposed Mr Tanami in turn.

The politics of Mr Muto’s nomination are unfathomable. Opposition parties control the upper house of Japan’s parliament so picking a fight is risky and best pursued only on matters with strong public support. But to pick a fight, lose and then pick the same fight again is bizarre. Mr Fukuda’s weak government now looks even weaker.

Mr Fukuda’s choice appears to have been driven by bureaucratic tradition as much as anything else: MoF retirees of a certain level have tended to get jobs at institutions such as the Bank of Japan. But while finance ministries are natural recruiting grounds for central banks and vice versa, the semi-formal parachuting of MoF officials into the BoJ reduces the independence of monetary policy.

The DPJ is therefore right to press for a stronger governor, and the candidates it finds acceptable – Haruhiko Kuroda, head of the Asian Development Bank, and Hiroshi Watanabe, a slightly more junior former MoF official – are hardly anti-establishment. Given the urgent need to fill the post, either would be possible.

But there is a case for a more radical choice. Governing a central bank is an unusual job: the perfect candidate must be a brilliant macroeconomist, a psychologist of the markets, a sure-footed public speaker, an international diplomat and an able chief executive. It is hard to find economists with the other skills, but also hard to find bureaucrats with a deep enough economic background to question their staff, rather than be led by them. The Bank of Japan would benefit from a governor able to challenge orthodox views.

One can argue that the lack of a governor does not matter: the Bank of Japan will still function, it is unlikely to change interest rates soon, and many important decisions are made by the Ministry of Finance. But at a time when new crises emerge on a daily basis, when confidence is fragile, and when the outlook for the Japanese economy is weakening, a vacancy at the top sends the wrong message. The government and the DPJ should agree on a candidate quickly. If Japan’s cosy system of public appointments is shaken up in the process, so much the better.

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