Japan does not have a central bank governor in the midst of the current financial turmoil. And there are few signs that it will have one anytime soon. It seems like a ridiculous situation be in, akin to having no one at the helm as a ship rolls into a perfect storm.
But there are some positive lessons here for India.
We need to look beyond the obvious and see why the Bank of Japan continues to be headless. The country’s opposition parties control the upper house in parliament. They have already rejected two names put forward by the government for the governorship of the Bank of Japan. They objected to both candidates because they are too close to the ministry of finance.
These are signs of further cracks in Japan’s monolithic economic establishment that drove a war-ravaged country into prosperity and then also pushed it into a decade of utter stagnation. Independent institutions regulating the economy are more admired in Japan than before.
So, what are the lessons for India? The Reserve Bank of India has had an enviable record in steering the Indian economy through financial turmoil and inflationary strain. Its stubborn refusal to drop interest rates despite pressure to do so will stand the Indian economy in good stead in the coming quarters.
Conflicts such as these exist in other countries as well, including the US. While the US president appoints the head of the US Federal Reserve, the strong principles of checks and balances in US government minimize presidential meddling in monetary policy.
Not all countries are that lucky. We have seen occasional disagreements between the central bank and the finance ministry, most recently about interest rate policy. India, too, should move towards a system where appointments of the central bank governor and other important regulators are vetted by a larger group of people, be it a multiparty committee of senior parliamentarians or a committee of experts. The government does have a process of consultation, but it needs to be institutionalized. This is not a call for central bank independence, but for a more open appointments process. A few delays such as the one in Japan right now are a minor cost to pay.
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