The Man Withhttp://online.wsj.com/article/SB120527019535428267.html?mod=rss_opinion_main
A Plan for the Bank of Japan
By JESPER KOLL
March 12, 2008
It looks like tough times for the Bank of Japan. Yesterday, the opposition Democratic Party of Japan (DPJ) rejected the government's nomination of Toshiro Muto as the new central bank governor, putting Prime Minister Yasuo Fukuda in a tough spot. But Mr. Fukuda should stick with Mr. Muto because he's the right man for the job.
Mr. Muto, a former vice minister at the Ministry of Finance, knows how Japan's policy strings can be pulled to generate economic growth. During the 1990s, he mobilized public funds to revitalize small- and medium-sized companies, not to mention Japan's far-flung provinces. He was an early advocate of the privatization of the postal savings and insurance system. Most importantly, when former Prime Minister Junichiro Koizumi appointed Mr. Muto as the Bank of Japan's deputy governor in March 2003, he immediately integrated his colleagues into government policy discussions previously closed to the central bank. Like few other Japanese leaders, Mr. Muto enjoys tremendous trust among the country's power triangle: technocrats, businessmen and politicians.
It's hard to underestimate how important those qualities are in modern-day Japan, where policy coordination is of utmost importance. The government sector still plays an enormous role, both through active spending and taxation, as well as a highly sophisticated -- if, at times, Byzantine -- quagmire of rules and regulations. To stimulate the economy, many levers can be pulled, with central bank policy playing an integral role. And today, with its economy slowing, Japan needs more, not less, policy coordination.
Since Prime Minister Koizumi stepped down in September 2006, the government cannot agree on whether it wants more deregulation or more reregulation, small government to empower entrepreneurs, or big government to protect the elderly and the farmers. The combination of a huge fiscal deficit (the debt-to-GDP ratio is now in excess of 180%) and near zero-interest rates puts policy makers in a seemingly impossible position. Easing fiscal policy or cutting interest rates appears to be out of the question. The current government, led by Mr. Fukuda, has done little to restructure the economy or Japan's complex regulatory structure. This has left the economy even more vulnerable to the ups and downs of the global business cycle.
It doesn't have to be this way. Japan still has ample room on all policy fronts to help stimulate economic growth and fend off recession. On the government front, Mr. Fukuda needs to rein in spending and deregulate the economy. And here's where, beyond prudent monetary policy, the Bank of Japan can help: More active central bank liquidity provisions would encourage banks to keep lending through the economic downturn, and better regulatory coordination would help to regain the public trust in the viability and soundness of the public pension and social security system, helping to boost consumption. None of this will happen if the Bank of Japan is left rudderless when the current governor's term expires next week.
Prime Minister Fukuda yesterday called the DPJ's rejection of Mr. Muto's nomination "a bit reckless" -- especially since they haven't nominated an alternate candidate. That is an understatement. The DPJ may fear Mr. Muto exactly because he's the kind of man who can construct a pro-growth strategy for Japan. And given where Japan's economy has -- or more correctly, hasn't -- gone in the past few quarters, that's cause for concern.