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February 19, 2013 9:36 am
Japan’s new government has made clear that loosening monetary policy tops its economic agenda. But its two most powerful figures have come close to open disagreement over just how far the easing effort should go, and who should lead it.
Shinzo Abe, the prime minister, and Taro Aso, the former premier who serves as his finance minister, took turns in parliament describing what Japan’s monetary policy might look like under the next governor of its central bank, who is expected to be nominated by the administration next week.
Their visions – Mr Abe’s more radical, Mr Aso’s more restrained – were different enough to send the yen in opposite directions on successive days, and to fuel talk of a rift at the top of a two-month-old government.
On Tuesday, Mr Aso said the government had “no interest” in having the Bank of Japan buy foreign bonds as part of an expanded arsenal of monetary policy options that it is hoped will help lift Japan out of nearly two decades of deflation.
The yen strengthened in response to the comments, as traders discounted the possibility that the BoJ would take the controversial step, which would be likely to accelerate the yen’s recent 15 per cent decline.
Mr Aso’s disavowal appeared in line with guidance issued by the Group of 20 nations following a debate over currency policies at the weekend. The G20 agreed not to “target our exchange rates for competitive purposes”, a pledge that many officials and analysts interpreted as ruling out foreign bond buying.
But it stood in contrast to the view expressed by Mr Abe a day earlier. Asked during a budget committee meeting what new steps the BoJ might take to fight deflation, the premier sent the yen lower by saying: “There is also the idea of buying foreign bonds, which is being debated internationally”.
Many observers saw the difference of opinion as an extension of a behind-the-scenes debate over who will succeed Masaaki Shirakawa when he retires as BoJ governor next month. Mr Aso is believed to favour a career civil servant with management experience and political connections, while Mr Abe is open to academics with a willingness to experiment with unorthodox policies.
A government official close to the process said there was “no question that a tense discussion is occurring” between the prime minister and finance minister.
Beyond their differences over foreign bond-buying, Mr Abe and Mr Aso have diverged over whether to revise the central bank law to weaken the BoJ’s independence – Mr Abe has kept the threat alive, while Mr Aso said on Tuesday the government has “no plans” to do so.
The nomination is expected to be decided after Mr Abe returns from a trip to Washington scheduled from Thursday to Sunday.
In addition to their personal preferences, Mr Abe, Mr Aso and other decision makers must weigh the response of financial markets and foreign governments, as well as opposition party politicians whose support will be needed to secure approval for the nominee in parliament’s upper house, where the ruling Liberal Democrats do not have a majority.
In public, Mr Aso has specified “no academics”, while Mr Abe has said he wants someone who can “project” Japan’s policies to a global audience. This was interpreted by some as a dig at Toshiro Muto, a taciturn former finance ministry official who is widely seen as Mr Aso’s favourite, and whose experience is mostly in domestic affairs.
Perhaps the most cautious of the leading candidates, Mr Muto’s chances could be hampered by his support for monetary tightening when he was deputy governor of the BoJ from 2003 to 2008. One of two opposition parties that the Liberal Democrats are courting for support opposes Mr Muto, and the other blocked a previous attempt to make him governor five years ago.
Meanwhile, Mr Abe’s favoured candidate is rumoured to be Kazumasa Iwata, an economist whose career has been divided between government and academia, and who served alongside Mr Muto as the second of the BoJ’s two deputy governors. Seen as the most radical among the top candidates, his aggressiveness – he was an early advocate of buying foreign bonds – could be a handicap given international concerns about the speed of the yen’s recent fall.
“After the G20, people like Iwata are seen as risky,” the government official said.
If neither Mr Muto nor Mr Iwata is chosen, the nomination could fall to Haruhiko Kuroda, another former finance minister official who now runs the Asian Development Bank, or Takatoshi Ito, a University of Tokyo professor and former adviser to Mr Abe.
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