Bank of Japan chief faces a country
WILLIAM PESEK
Sun
If you think Ben Bernanke has a lot on his plate, consider the dilemma facing Toshihiko Fukui. With markets plunging and the U. S. on the verge of recession, Federal Reserve chairman Bernanke’s role is straightforward: Cut interest rates and pledge to make as many moves as needed to restore calm to the global economy.
Not so for Bank of Japan governor Fukui, who is grappling with whether to lower rates — or raise them.
As financial contagion spreads from the U. S. around the world, one school of thought has it that Fukui should add more liquidity to Asia’s biggest economy. Japan’s growth, after all, was weak before economists began their U. S. recession vigil. And Japan still hasn’t defeated deflation.
Another school wonders if the BOJ should be raising its overnight lending rate from the current 0.5 per cent. Excess money from Japan has been fueling bubbles around the world for years, contributing to today’s market volatility. Nearrecord oil prices aren’t helping.
This week, Fukui and his colleagues took the path of least resistance, leaving rates alone. Yet sitting on the monetary fence may not be an option much longer.
Fukui may simply be in denial. His five- year term ends in March and he has failed in his two goals: ending deflation once and for all and normalizing interest rates.
Japanese rates have been near zero for a decade now, and Fukui was determined to return shortterm rates to economically rational levels. No central bank, never mind one overseeing a Group of Seven economy, should ever become such a pawn of politicians that it essentially eliminates borrowing costs.
While Fukui has raised rates twice, he must regret being so timid. Japan has been growing healthily since 2002 and the economy could have sustained a few more rate moves.
The European Central Bank doesn’t have the dual mandate that complicates decisions for its peers. It is only concerned with price levels, while Bernanke also needs to juggle employment data. Japan’s central bank, it’s often forgotten, is the least independent of the three.
Lawmakers are already calling for Fukui to act as the chance of the world’s two biggest economies falling into recession increases. Politicians are also fretting about the yen’s 4.6- per- cent surge versus the dollar this year as export growth slowed for a second month in December.
It’s worth asking how a central bank that offers free money could do more. Politicians have used the B O J a s a n a u t o m a t e d t e l l e r machine since the asset bubble of the 1980s burst. Now, constrained by the largest government debt among developed economies, politicians are again looking for a BOJ bailout.
The odds favor them getting their way. It’s legacy- protection time for Fukui, and the last thing the BOJ wants is to be blamed for tipping Japan back into recession. Politicians are already setting Fukui up as the fall guy as growth slows.
It almost doesn’t matter whether a slight rate cut would help Japan’s economy. It would be more of an exercise in confidence- boosting than anything. That’s part of Japan’s policy dilemma. Politicians, business people and consumers have become so reliant on zero interest rates that they almost can’t function without them.
Japan’s real- estate market is already showing signs of duress and office rental growth in Tokyo may slip below 10 per cent in 2008 for the first time in four years.
The Nikkei 225 Stock Average this week experienced its worst two- day drop in 17 years. Amid such wild swings in markets, pokerfaced Fukui can deny a rate cut is coming all he wants. Reality may soon have the BOJ playing a different game.