The Pope of Japanese Finance
TOKYO – While the world focuses on the gathering of cardinals in Rome to choose a successor to Pope Benedict XVI, a similar conclave is underway in Tokyo to choose the Bank of Japan’s (BOJ) next governor. And, as with the deliberations at the Vatican, politics, not doctrinal debate, is underpinning the decision-making process in Japan.
Last December, the president of the Liberal Democratic Party, Shinzo Abe, won back control of the government for the LDP after more than three years in opposition, securing the post of Prime Minister for the second time. In his election campaign, and since coming to power, Abe has advocated a radical revitalization of the Japanese economy that would end two decades of deflation and growing political and strategic uncertainty.
In anticipation of an LDP-led government (with the New Komeito Party as a junior coalition partner), financial markets began to move toward a weaker yen. Japan’s stock market reacted favorably as well, rising almost 30% since the vote.
Abe’s three main economic policies, dubbed “Abenomics” by the global press, are known at home as the “three arrows” approach – a reference to the sixteenth-century daimyo (feudal lord) Mori Motonari, who had three sons. One day, Motonari asked each of them to snap an arrow, which they did without difficulty. But when he then asked them to snap three arrows, none could do it. Having demonstrated that what is fragile on its own can be robust in a bundle, Motonari urged his sons to remain united.
The three arrows in Abenomics are fiscal spending, deregulation of cosseted sectors of the Japanese economy, and monetary easing. The supplementary fiscal spending will span a total of 15 months, focusing on speedy completion of public works required for recovery after the Great East Japan Earthquake of 2011. The growth strategy will include targeting industries like regenerative medicine, with greater spending, for example, on cell research conducted by Nobel laureate Shinya Yamanaka; it will also feature policies aimed at leveraging the power of women, who are underrepresented in the work force, particularly when compared to other modern economies.
The problem, from the start, was the third arrow. The BOJ’s current governor, Masaaki Shirakawa, holds very different views on fiscal and monetary policy from those on which Abe campaigned. Indeed, it was Shirakawa who, as BOJ Executive Director, decided in March 2006 to end – quite prematurely – the quantitative easing that Prime Minister Junichiro Koizumi’s government had implemented at the beginning of 2004.
When a new BOJ governor was chosen in 2008, Shirakawa was initially seen as a dark-horse candidate. But the nominees presented by the LDP government of Prime Minister Taro Aso (who is now Abe’s finance minister) were repeatedly rejected by the Diet’s upper house, which was controlled by the opposition Democratic Party of Japan. The DPJ claimed that these candidates were too closely tied to the finance ministry, owing to long careers there, to act independently of it. But the real reason for their rejection was that the DPJ was intent on bringing down the LDP government, and thus was obstructing it whenever possible.
Uncertainty reigned for a considerable time. But, in order for Japan to avoid being unrepresented by its central banker at a looming G-7 meeting of finance ministers, an agreement was reached at the last minute to appoint Shirakawa.
Throughout his five-year tenure, Shirakawa has maintained a hawkish policy stance, insisting that monetary easing would have no possible benefit for Japan’s long-stagnant economy. All that time, he faced consistent political pressure to determine a positive inflation target that would halt the country’s deflationary spiral. But he resisted ever setting such a “target.” Only in January of this year, following the LDP’s landslide election victory, did the BOJ set a target of 2% price growth and issue a joint announcement with the government taking aim at deflation.
This is the context in which the BOJ’s next “pope” is being selected. But, instead of a debate about monetary policy, the only question being asked is whether Shirakawa’s successor will come from the finance ministry, academia, or business.
Abenomics’ goal is to escape two decades of deflation. Its purpose is not to encourage the depreciation of the yen, despite complaints about the yen’s depreciation. With Europe’s economy showing no sign of recovery and growing concern about a Chinese slowdown, Japan cannot afford to continue to tread water. As a responsible international stakeholder, Japan must stimulate its economy to provide an additional catalyst for global growth.
Abe’s government has now announced that Haruhiko Kuroda, the president of the Asian Development Bank and former Vice Minister of Finance for International Affairs, will be its choice to succeed Shirakawa as BOJ Governor. Despite partisan bickering, the opposition will not resist the appointment of someone with both the vision and the administrative skills to act boldly. Japan, at long last, will not have to fight deflation with one hand tied behind its back.
Yuriko Koike, Japan’s former defense minister and national security adviser, was Chairwoman of Japan's Liberal Democrat Party and currently is a member of the National Diet.
Copyright: Project Syndicate, 2013.