All's well that ends well; or, much ado about nothing?

As expected, the DPJ-led House of Councillors approved the nomination of Shirakawa Masaaki, the acting governor of the Bank of Japan, to serve as the full-fledged governor, thus ending Japan's three-week nightmare with only an acting governor at the helm of the BOJ. Mr. Shirakawa will make his debut on the international stage later this week at the meeting of G7 finance ministers and central bankers in Washington Friday.

Also as expected, the HC rejected the nomination of Watanabe Hiroshi, former administrative vice minister of finance and professor at Hitotsubashi University, to serve as a deputy governor.

Not surprisingly, the government responded to the DPJ's rejection of Mr. Watanabe by complaining about the DPJ's prioritizing politics over the public interest. As Ibuki Bunmei, the LDP secretary-general, said, "One can think only that this decision prioritizes party interests at the expense of national interests."

In stating the DPJ's reasons for opposing Mr. Watanabe, Hatoyama Yukio, DPJ secretary-general, said (somewhat pathetically, as noted by Jun Okumura), "It is President Ozawa's strong desire to not accept amakudari."

As Okumura writes, Mr. Ozawa actually outmaneuvered his DPJ rivals on this vote. Many of the hardline anti-Muto DPJ members were willing to support Mr. Watanabe's nomination, but Mr. Ozawa nixed that idea on the same grounds that his rivals opposed Mr. Muto (thereby forcing Mr. Ozawa to take a harder line on the BOJ succession than he was prepared to take initially). In the end, only three DPJ HC members voted in favor of Mr. Watanabe. It is unclear how the DPJ can punish the three, given its slim hold on the HC.

It is worth noting that the BOJ's monetary policy committee decided to leave interest rates unchanged in light of worsening economic conditions at home and abroad. For all the alarm that greeted the non-vacancy vacancy at the BOJ, the international economic "narrative" has been considerably less important than the domestic politics narrative.

This fight was about each party's trying to position itself in advance of the next general election and to a lesser extent about the future of Japanese governance. Hence the LDP has to this day used this fight to emphasize the DPJ's lack of concern for the national interest. Hence to this day the DPJ has emphasized that it is standing against amakudari government and the pervasive influence of the Ministry of Finance.

I think that the DPJ comes out looking better over the long term — and that is a good thing for Japanese democracy. The DPJ was able to say no to the government (and the MOF) and make it stick. The DPJ got exactly what it demanded. The new BOJ governor is a thirty-year veteran of the BOJ and he is the third consecutive BOJ OB to be named governor. The DPJ's rejection of all MOF OBs may now have been taken to an irrational extreme by Mr. Ozawa's response to intra-DPJ opposition — as even his opponents recognize — but it's preferable to rolling over and accepting whoever the government sends over to the Diet.

It's unlikely that the LDP will change its ways and become more accommodating of the DPJ after this battle, but the DPJ should take every opportunity to remind the government that there are two houses in the Diet, one of them is controlled by the opposition, and the government can't govern solely by Articles 59-61. The DPJ should continue doing what an opposition party, especially an opposition party with some power, should do: question, cajole, expose, and undermine the government at every turn. That's democracy. It should, of course, connect its actions to a broader message, but it should not feel compelled to govern. The upside of controlling the upper house is that it is unreasonable to expect the DPJ to act like a governing party. The DPJ's access to the bureaucracy is still less than the LDP's, so it is at a disadvantage in terms of policy formulation. The government's budget took precedence due to Article 60. The HC has no way around HR approval for its approved bills. Control of the weaker chamber by an opposition party is good for little more than harrying the government and forcing it to change its ways to accommodate the opposition.

I suspect that media's refrain that the public will vote against the DPJ if it is too obstructionism is vastly overblown. The LDP's failures — like the still-vanished pensions, for example — will be more than enough to dampen whatever concerns voters have about the DPJ's doing what an opposition party should be doing.

Without a clue

LDP proposes, DPJ disposes — again.

As MTC points out, the LDP did the exact same thing in introducing the nomination of Tanami Koji as it did with the nomination of Muto Toshiro: it failed to consult with the DPJ beforehand.

Indeed, showing that it has learned absolutely nothing and suggesting that the government is in fact not above playing politics, it submitted, in the words of Hatoyama Yukio, DPJ secretary-general, a man with the "same career history as Mr. Muto."

Little wonder that the DPJ has rejected this latest, feeble effort to avoid a vacancy in the leadership of the BOJ.

While the DPJ has once again stated that the reason for the rejection is fears about the independence of the BOJ from the Ministry of Finance, this fight is not about central bank independence. It is about the LDP's persistent inability to come to terms with the idea that the Diet is divided and that it needs to consult with the DPJ beforehand, especially in cases like this in which it has no recourse to the Article 59 override used in the MSDF refueling mission case.

Heading into the midst of the worst economic conditions since World War II without a central banker may be harrowing, but maybe it will be the only way the government will learn that treating the opposition with condescension doesn't work when the opposition has a major stake in the policymaking process. For all the complaints about DPJ intransigence, the government bears much of the blame for a failure to find a way to compete short of mutually assured destruction or cooperate short of a grand coalition.

The looming empty chair "crisis"

Following the government's formal nomination of Muto Toshiro for the post of BOJ president on Friday, the LDP launched a war of words over the weekend to paint the DPJ as irresponsible and pressure it to accept Mr. Muto to prevent a vacancy at the BOJ.

On Saturday, Tanigaki Sadakazu, LDP policy chief and former finance minister, criticized the DPJ's argument that a former MOF bureaucrat is unfit for the BOJ presidency by stating that there are many examples of European central bank presidents who came out of finance ministries.

Ibuki Bunmei, LDP secretary-general, took a different approach on Saturday. Speaking in Sapporo, he trotted out the well-worn line cautioning the DPJ about "misusing" its power: "The DPJ obtained the power of the majority in last summer's Upper House election. It is now being tested whether it will be an 'upstart in power' or whether it will use its power correctly on behalf of the nation. We hope that from the start of the week they will not abuse their power and will solemnly choose to exercise good sense."

Mr. Ibuki also appeared on NHK on Sunday to declare that Mr. Fukuda has rejected the DPJ's offer of face-to-face talks in exchange for the government's nominating another candidate in place of Mr. Muto.

Ota Akihiro, head of Komeito, has also criticized the DPJ for its inflexibility.

The DPJ has responded blow for blow. On Saturday, Hatoyama Yukio, the DPJ secretary-general, criticized Mr. Muto's appointment as an "amakudari appointment," and made the offer that was subsequently rejected by Mr. Bunmei. Kan Naoto, the DPJ's acting president, emphasized on NHK Sunday that the DPJ's position is unchanged — there will be no compromise on Mr. Muto.

It is possible to overstate the importance of a vacancy at the Bank of Japan. Both politicians and commentators have assumed that because of the global financial situation, a vacancy at the Bank of Japan would be a disaster. I don't quite buy this argument. As Wolfgang Munchau argues in the FT, "For as long as this financial crisis persists, interest rates will be determined by toxic market conditions, not central bankers. Among the various channels through which monetary policy affects the real economy, the credit channel is one of the most important. If real-world interest rates are determined independent of a central bank’s monetary policy, the effect of monetary policy on economic growth is correspondingly reduced."

Of course, Munchau does not argue that central banks are totally irrelevant — nor do I — but the practical impact of a failure to nominate a new BOJ chief by March 19 is not particularly great. Even the symbolic impact of a BOJ vacancy on the markets may be overstated: there are other, more enduring factors determining the flow of money in and out of Japan at the moment.

As the weekend's rhetoric makes clear, this battle is a preview of a general election campaign. Both the LDP and the DPJ have imposed their "narratives" on this issue. Can you really trust the DPJ with the government, the LDP asks. Look at the LDP, the DPJ says. In bed with the bureaucrats. Not much room for a compromise here, particularly because each side has escalated, much like in the fight over the MSDF refueling mission. In particular, there is no easy way for the DPJ leadership to back down, because Mr. Ozawa's fiercest opponents within the DPJ are also the fiercest opponents of the Muto nomination.

The LDP acts to shift the blame

In a transparent attempt to shift the blame for the Bank of Japan "crisis" from the government to the DPJ, today the Fukuda Cabinet officially submitted its nomination of Muto Toshiro to be the next BOJ president. If a Mr. Muto or another candidate is not confirmed within the next twelve days, the post will be vacant.

Without the agreement of the DPJ-controlled HC, any nomination is a non-starter.

The Fukuda government seems increasingly desperate to see this battle concluded in its favor, and to that end is pursuing two strategies simultaneously. One strategy calls for Mr. Fukuda to discuss the issue with Mr. Ozawa in the hopes of reaching an agreement. Yamaoka Kenji, Ozawa loyalist and DPJ Diet strategist, nixed this idea completely on behalf of Mr. Ozawa, suggesting that the DPJ will consider Mr. Muto's nomination itself and then answer the government. The other strategy is, of course, what the government did today: nominating Mr. Muto in an attempt to place the burden for a vacancy on the DPJ.

According to Mainichi, the DPJ recognizes that the government's move has put it in a tough position, as the party neither wants to bear the blame for a vacancy nor roll over for the government. We may be reaching the point at which the DPJ's latest wave of momentum dissipates — a point made by Jun Okumura here. Although the DPJ has indicated that it will not consent to Mr. Muto's nomination, the possibility of an about-face remains.

It will ultimately depend on Mr. Ozawa's read of the political situation. If Mr. Ozawa reckons that the domestic political consequences of opposing the government's nomination are slight, the DPJ will without question say "damn the markets" and reject the nomination. If he concludes that obstructing Mr. Muto's elevation to the BOJ presidency will play into the LDP's efforts to construct a general election narrative that paints the DPJ as little more than a noisy rabble unfit for government, the DPJ may step back from the brink of obstruction, make some show of having vetted Mr. Muto and declared him not tainted by his MOF past, and move on to the next issue. Doing so would entail not just a defeat for the DPJ, but also move the DPJ closer to an open fight over the leadership of the party, as anti-Ozawa DPJ members — some of whom have been leading critics of Mr. Muto's nomination on the basis of his MOF past and concerns for BOJ independence — may react by taking their desire to see Mr. Ozawa unseated in the September party leadership election out into the open.

This situation is typical of the DPJ's strategy since winning the HC election. Faced with what appears to be an opportunity to undermine the government, the DPJ throws all of its energy into exploiting it, only to overextend itself and leave itself vulnerable to public backlash and charges of fecklessness from the government.

A large segment of the public may be ready to vote against the LDP in a general election, but I reckon an even greater segment of the public wants the government and the Diet to work on their behalf.

Regardless of the resolution of this "crisis" — I use the quotation marks because aside from a slight shudder in the market, the world will not end if there is a vacancy at the BOJ — one thing is certain: it will prompt a new wave of articles in the foreign press lamenting the consequences of Japan's supposedly byzantine politics.

The DPJ keeps pushing

With the Fukuda cabinet's popularity in free fall thanks to the fallout from the Atago incident, the DPJ's stance on the government's nomination of Muto Toshiro to be the next BOJ president has become decidedly less ambiguous. The DPJ has indicated that there is no chance of its consenting to Mr. Muto's nomination.

In response, Ibuki Bunmei, LDP secretary-general, has criticized the DPJ for "playing politics" with the nomination. Playing politics. As if the DPJ is in the wrong for exercising its prerogatives as the largest party in the House of Councillors and forcing the LDP to respect the opposition.

Mr. Ibuki, the game has changed. Through a series of accidents, the DPJ is once again in a position to criticize the government for its poor handling of just about every issue it faces. This is the approach emphasized by Ozawa Ichiro, who spoke of the government's breach of trust in the relationship between LDP and DPJ, and Yamaoka Kenji, who suggested that if there is a vacancy at the BOJ, it will be the government, not the DPJ that bears the blame. The government, the DPJ reasons, will be the anger of the global markets for failing to do whatever necessary to placate the DPJ and ensure a smooth transition at the BOJ.

The DPJ may be right, because, after all, among those whose voice actually matters when it comes to forming governments, I imagine that the LDP's claims that the DPJ is "playing politics" with the BOJ transition will stick less than the opposition's claims that the government has mishandled every issue it has confronted and can't even tackle corruption and malfeasance within the bureaucracy.

Another turn may be waiting in the wings, but it looks like the DPJ has played this issue right: from the start it focused on the process of HR-HC "dual-key" nominations rather than specific nominations, preserving its options to cooperate or resist depending on the public mood. The government, so certain that it would get its man, only now seems to be preparing alternative nominees (Yamaguchi Yutaka, a former BOJ vice president, has been suggested) that might placate the DPJ.

Welcome to the divided Diet, Mr. Fukuda (and Mr. Bunmei, et al).

Peace in our time (well, not really)

The LDP and the DPJ have come to an agreement on the process for approving candidates for positions that require HR-HC consensus. The terms of the agreement, the result of negotiations between the two parties' Kokutai chairmen, calls for separate hearings for candidates in the HR Committee on Rules and Administration and the HC Committee on Rules and Administration. Nominations will first go to a joint committee of representatives from both houses, before being submitted to the two houses.

One point of contention was the timing of the release of the records from the hearings. The LDP wanted them sealed until the end of a nominee's term. The DPJ rejected this arrangement, and the final agreement calls for the records to be released after a nominee is confirmed.

However, Yamaoka Kenji, the DPJ's representative in the talks, cautioned that this agreement does not necessarily mean that the DPJ will agree to confirm Muto Toshiro, the government's candidate for the BOJ presidency. The LDP continues to hope that the DPJ will see reason on the BOJ succession. With the new rules in place and the DPJ leadership closing ranks behind Mr. Ozawa, the DPJ will likely sign off on Mr. Muto — although it will be curious to see the hearing transcripts when they're released, especially in the HR, where Sengoku Yoshito, Ozawa rival and opponent of Mr. Muto's appointment, sits on the Rules and Administration Committee.

This agreement should be applauded: the DPJ held its ground on taking an active role in joint confirmations, the BOJ executive will probably not be vacant at a critical period in the global economy, and the two parties showed that fears of gridlock are overblown.

More trouble on the BOJ succession

In a meeting between Oshima Tadamori and Yamaoka Kenji, the Diet strategy chairmen of the LDP and DPJ respectively, the two parties came closer to an agreement on joint personnel decisions. They discussed a proposal that envisions an "expanded representatives committee" of twenty from both houses that will question government-nominated candidates about their policy positions in closed hearings, although the records of the hearing will be released once a successor candidate's term ends.

However, Mainichi reports that the question of the BOJ succession is becoming the subject of a growing struggle within the DPJ between pro-Ozawa and anti-Ozawa forces. At the same time that the DPJ leadership is struggling to reach an agreement with the LDP on how to vet nominees, Mr. Ozawa is fighting a rearguard battle within the DPJ. Edano Yukio, a former head of the party's policy bureau, and Sengoku Yoshito, the head of the party investigatory subcommittee handling joint appointments, are opposed to the nomination of Muto Toshiro due to fears for the independence of the BOJ from fiscal authorities. Mainichi suggests that this dispute is becoming the first major power struggle since Mr. Ozawa's aborted resignation last November.

Mr. Ozawa, not surprisingly, fired back, reminding Mr. Sengoku that his subcommittee's remit is limited to reporting to the party executive on the candidate under consideration. Slightly to my surprise, Kan Naoto and Hatoyama Yukio, Mr. Ozawa's fellow executives, closed ranks behind him, reminding the dissenters that the final decision is theirs.

Wrapped up in this issue is the question of the September leadership election. Mr. Ozawa is also facing pressure from Okada Katsuya, a potential successor to Mr. Ozawa, who has said that he feels "uncomfortable" with Mr. Muto's nomination for the same reasons as Messrs. Sengoku and Edano. Mainichi warns that should Mr. Okada link up with the other dissenters, "it could quite possibly influence the outcome of this September's party leadership election." For the moment, however, Mr. Okada hasn't completely nixed the Muto nomination, at least according to Fujii Hirohisa, a channel of communication between Mr. Okada and Mr. Ozawa. And Mr. Ozawa's reelection looks increasingly assured, as a series of party leaders have come out in support of Mr. Ozawa's remaining the head of the party.

With the party leadership united against letting Mr. Sengoku's subcommittee call the shots on the nomination, it is unlikely that the dissenters will get their way. The BOJ succession will proceed, but a bit less smoothly than the government and the markets would have hoped. I just wonder why Mr. Ozawa gave them an opening in the first place. And I wonder how Mr. Ozawa, not known for being charitable with those who dissent from his course of action, will deal with his rivals. (Or has control of the House of Councillors tied Mr. Ozawa's hands in dealing with intraparty rivals, as in the case of Ōe Yasuhiro and other dissenters on the special road construction fund?)

The DPJ continues playing hard to get

As I wrote on Monday, the DPJ may ultimately come around to Muto Toshiro, the government's candidate for the presidency of the Bank of Japan, but it will not give in to pressure — and it will make its decision on the nomination on its own terms and at its own pace.

It increasingly looks like the DPJ's pace will keep the government and the markets guessing into March.

On Tuesday, Ozawa Ichiro backed away from previous remarks suggesting that he will defer to the judgment of the DPJ's investigatory subcommittee on joint personnel decisions. Instead, a committee of DPJ executives and Diet strategists will decide on personnel. The publicly stated reason for the DPJ's foot-dragging remains Mr. Muto's service in the Finance Ministry. Building on that, the DPJ's Financial and Monetary section announced a standard of evaluation for candidates for the BOJ presidency, including (1) independent from the government and the Diet, (2) knowledgeable about the domestic and international financial environments, (3) crisis management skills, and (4) skills for communicating with the market.

Again, I doubt that the DPJ will ultimately veto the Muto nomination, but that doesn't mean the party won't make Mr. Muto and the LDP jump through hoops to get him confirmed.

The headline says yes, but the body says not yet

The FT's David Pilling reports that the DPJ will accept the government's nomination of Muto Toshiro, currently the BOJ's deputy governor, to serve as Fukui Toshihiko's successor as BOJ governor.

At least that's what one might think from the headline: "Japanese opposition to accept new bank chief."

The body of the article, however, indicates that while the DPJ has softened its opposition, it has yet to assent officially to the government's nomination.

In fact, Ozawa Ichiro, DPJ president, insisted over the weekend that the DPJ's position is "blank" — he will respect the decision of the party's investigatory subcommittee on joint personnel decisions. Sengoku Yoshito, the subcommittee chairman, emphasized the need for a proper debate on Mr. Muto's elevation to the bank presidency.

It's perhaps a little hasty to assume that Mr. Muto is set to assume control next month. I expect that the DPJ will ultimately assent — as the FT article makes clear, the DPJ's objections are flimsy — but I suspect it will not do so until it has made its point to the government about the need to share power properly, especially in an area like this in which the constitution mandates a role for the House of Councillors.

UPDATE: Definitely read Jun Okumura's post on this debate.

Japan's revenge

Over at Project Syndicate, Thomas Palley outlines the argument about how the yen carry trade is fuelling global asset bubbles — although Finance Minister Omi denies that Japan's low interest rates are the cause of the carry trade.

Aside from rehearsing the standard arguments about how Japan's barely-over-zero interest rates contributes to global instability and the appreciation of the dollar, Palley also suggests that Japan's lagging growth in consumption could be corrected with an interest rate hike because a hike could signal to Japan's elderly that their income is safe over the long term: "Current ultra-low interest rates may be scaring people about the adequacy of future income. Raising rates could alleviate those fears, increasing consumer confidence and spending."

In Chicago on business this week, I had a conversation with my father — whom I should probably have write here from time to time — about the global risk environment, and he noted wryly that the carry trade is Japan's revenge for the 1987 Louvre Accord, which mandated that Japan permit the yen to rise as the dollar fell, correcting for the overshooting of the 1985 Plaza Accord. The outcome of the Louvre Accord was Japan's asset bubble, bringing us — after the interlude of a "lost decade" — to where we are today, with Japan in no hurry to be the first to alter its monetary policy to correct global imbalances.

Will the Bank of Japan raise interest rates again? Knowing Fukui's eagerness to "normalize" Japanese monetary policy, it seems like a matter of time — although probably not until after July's Upper House elections.

The one certainty though is that it will be at a time of Japan's choosing, not the product of pressure (in the G7 for example) to alter its policies to carry a greater share of the burden of global readjustment.

And all that is a long way of saying that I'm back in Japan, after an unplanned overnight stay in San Francisco, so my posting will be back to normal

Quantative easing continues

So the BOJ opted to raise interest rates by .25%. Ken Worsley has the wrap-up here.

It seems that the effect on the carry trade will be negligible; the EU will no doubt still complain about the weak yen; and the BOJ's independence is still in doubt.

Interest rates, again

The Bank of Japan is due to consider once more tomorrow whether it is the right time to raise Japan's interest rates again.

The last time, you may recall, the Bank's policy meeting was surrounded by a storm of debate surrounding comments by senior LDP and government officials questioning the wisdom of raising rates again (discussed in this post).

This time, however, a mere month later, following the Yanagisawa storm and the threat of G7 action on the weak yen at its meetings in Germany earlier this month, there's nary a peep out of the government or the LDP, unusual for the Abe Cabinet, which has been described as having "foot-in-the mouth disease."

Ken Worsley, of Trans-Pacific Radio and now the Japan Economy News & Blog, summarizes the relative lack of silence on tomorrow's meeting in this excellent post.

His conclusion: "...I don’t think the fundamentals are actually there for a rate hike, unless one prefers to go by some funny numbers."

I'm inclined to agree, but, then again, I've previously described BOJ President Fukui as having an "itchy trigger finger" as far as interest rates are concerned, and this might be a rate hike the Abe Cabinet can get behind: a rate hike could be used by the GOJ to point out to concerned Europeans that the government isn't tampering with the yen, with the recent GDP number -- however ambiguous -- providing cover for the move. Without the public fuss, a rate hike could allow the BOJ to reassert some semblance of independence -- however the reality plays out in invariably smoke-filled rooms in posh drinking establishments.

So the question of how big the rate hike will be depends on one's view of how Japanese monetary policy is made. If the BOJ is truly independent, look for something bigger, perhaps even on the order of fifty basis points; if it's not, look for something smaller, that serves both the government's and the bank's political needs.

Will they or won't they?

The "they" in the title of this post are, of course, the members of the Bank of Japan's Policy Board, and the 120.54 million yen question is whether its members will vote to raise interest rates on Thursday.

Call me naive, but I'm used to the Fed's way of doing business, namely advertising the direction of its next move long in advance so various actors in the economy (domestic and global) have plenty of time to factor the central bank's anticipated policy direction into their decision making.

Japan, meanwhile, seems to have concluded that predictability is overrated. First, senior members of the LDP openly questioned the wisdom of a rate hike last weekend, as I discussed in this post, raising questions about even the circumscribed independence of Japan's monetary authorities. Then, as if to throw the markets a curve, Omi Koji, Japan's finance minister, stated matter-of-factly yesterday that he sees no problem with the BOJ raising interest rates, and, to muddy the waters even further, Chief Cabinet Secretary Shiozaki declined to comment on the prospect of a rate hike. (See this article in the Yomiuri Shimbun).

And then, to throw tomorrow's outcome completely into question, Reuters is now reporting that the BOJ is "unlike to raise rates."

In the midst of the speculation regarding the short-term direction of Japan's monetary policy and with it Japan's economic recovery, it's worthwhile to check out this interview in the English edition of the Asahi Shimbun with Koizumi economy czar and current Keio University professor Takenaka Heizo, in which Takenaka calls for, among other things, inflation targeting by the BOJ. But he also once again implicitly criticizes the Abe Cabinet for its reluctance thus far to push forward with what he calls "proactive reform."

This is indeed curious. Economic reform was pretty much the raison d'etre of the Koizumi Cabinet, but it seems that reforming the Japanese economy so that it remains dynamic and prosperous is too pedestrian for Prime Minister Abe -- he apparently likes a challenge, like completely remaking Japan's institutions as they have existed since the end of World War II.