Japan’s opposition doesn’t want a central bank governor too closely tied to the ministry of finance (MoF). So the House of Councillors voted down Koji Tamani’s nomination on 19 March. It was a good call; Japan’s monetary policy isn’t independent enough of MoF, where Tamani used to work. Having no governor temporarily is better than appointing a weak one and being stuck with him until 2013.
With Japanese inflation solidly positive and growth good, interest rates need to be raised to provide adequate returns for savers. But the global financial crisis has given the Bank of Japan (BoJ) an excuse not to raise them.
Tamani and the previous governor candidate Toshiro Muto, also a former senior MoF official, represented an attempt by the MoF bureaucracy to reassert its control over the central bank. It had been made more independent by the 1997 Bank of Japan Law and by the independent-minded outgoing governor Toshihiko Fukui, whose background had been in business.
Even under Fukui, BoJ was not truly independent. In January 2007, it was compelled to delay for a month its increase to 0.5% in the uncollateralized overnight call rate. It postponed further increases until after the House of Councillors election in July. At its August meeting, the credit crisis was used as a new excuse for not raising rates, and ongoing market turbulence is likely to continue to prevent increases in the coming months.
Japan’s savers have been penalized for a decade by interest rates near zero. The savings rate has fallen from 16% to 6% since 1991. That has prevented Japan’s elderly population from accumulating enough to fund retirements. An overnight call rate of around 2-3% is necessary to restore the long-term health of the Japanese economy.
Recently confirmed BoJ deputy governor Masaaki Shirakawa is a career central banker, and should do fine as interim governor until the political parties agree on a permanent appointment. That individual should be independent of BoJ, and have enough political support to force through rate increases.