Early Exit from Bank of Japan Governor is Good for Abe

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Bank of Japan Governor Masaaki Shirakawa told Prime Minister Shinzo Abe yesterday (Tuesdsay) that he will step down a few weeks early, on March 19, in order to align his term, which expires on April 8, with those of the two BoJ deputy governors.

"I told the prime minister that I will resign on March 19 so that a structure with a new governor and two deputy governors can start simultaneously," Shirakawa said at a press conference called after a meeting of the Council on Economic and Fiscal Poicy.

This will enable Abe to replace the entire central bank leadership all at once with people who are more sympathetic to his policy of unlimited easing.

Although some press reports have highlighted the apparent unenthusiastic support Shirakawa is giving to Abe's policies, Shirakawa's resignation is really just putting the Bank of Japan leadership transition process back to normal.

The Bank of Japan governor must be approved by both houses of the Diet. Back in 2008, former deputy governor Toshiro Mutoh was nominated for the top spot by the ruling Liberal Democratic Party (LDP) which held a majority in the Lower House but not in the Upper House, where the opposition Democratic Party of Japan (DPJ) held sway.

The DPJ rejected Mutoh's nomination and it took three weeks of political infighting before Shirakawa was approved as a compromise candidate and took office on April 9.

The situation is exactly the same today. Abe's LDP has a super majority in the Lower House but must get some opposition support to get their nominee approved by the Upper House.

By resigning as governor effective March 19, Shirakawa is undoing the delay caused by political wrangling five years ago.

The Battle Over the Next Bank of Japan Governor

Opposition parties are taking advantage of their new-found importance to extract concessions from the LDP government. Prime Minister Abe is negotiating with the main opposition party, the DPJ, and with a group of three splinter parties that, together, could hold enough votes to put Abe's nominee over the top. Abe needs one or the other to get what he wants.

The reason this is important is that the opposition parties are placing their own conditions on who they will accept to be the next BoJ chief.

There are seven possible candidates for the governorship. Five are academics. The other two run private sector think tanks. Three of the seven were career bureaucrats in either the Ministry of Finance or in the Bank of Japan itself.

The splinter party with the largest number of seats in the Upper House has said repeatedly that it will reject any Ministry of Finance or Bank of Japan "old boy" even though Prime Minister Abe has said that he would not reject a career bureaucrat out of hand.

The DPJ has set its own conditions for supporting a nominee for BoJ governor but these have been crafted with enough wiggle room to allow the opposition party to throw its support behind anyone it chooses.

Handicapping the Race for BoJ Governor

Based on our study of the various conditions set by the LDP and the opposition parties, we have narrowed down the field to two candidates.

An investor favorite, although he is a dark horse, is Heizo Takenaka, an academic who held several Cabinet posts under former Prime Minister Junichiro Koizumi and was Koizumi's right hand man on reform. Takenaka is bitterly opposed by Minister of Finance Taro Aso, himself a former prime minister, for his role in the privatization of Japan Post. But Takenaka is well-known by foreign central bankers and investors and is likely to be well-received by the markets, an important point in favor of his candidacy.

Another pick is Kazumasa Iwata, President of the Japan Center for Economic Research, a private sector think tank. Iwata formerly served as deputy governor of the Bank of Japan and, although less well-known by the markets, is widely respected by other central bankers.

Both of these candidates are strong supporters of Abe's policies. Either one could be named to one of the two deputy governor spots that must also be filled.

Ultimately, the choice of who will be the next Bank of Japan governor will be a political decision based on which candidate gets the most opposition support at the lowest cost.

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