Bank chaos

The fight between the LDP-Komeito governing coalition and the DPJ over the leadership of the Bank of Japan shows no sign of abating.

On Wednesday, of course, the DPJ-led House of Councillors formally rejected the government's nomination of Muto Toshiro to be the new president of the BOJ. The government has resubmitted Mr. Muto's nomination in response. In his daily press conference Wednesday, Chief Cabinet Secretary Machimura Nobutaka professed an inability to understand the DPJ's reasoning and once again highlighted the urgency of a smooth transition to a new BOJ president given prevailing financial conditions.

I must agree with MTC: the DPJ does not bear the blame for this "crisis" alone. For all of Mr. Fukuda's willingness to cooperate with the opposition, his party and his government have failed to come to terms with new masters of the Upper House. They have refused to accept that they actually have to consult with the DPJ, instead of presenting them with proposals as faits accompli (as they did in the case of Mr. Muto). Not surprisingly, Kitagawa Kazuo, Komeito secretary-general, used this occasion to complain about the constitutional defect of the HC's role in personnel appointments, illustrating the disdain with which the government still views the opposition's control of the HC.

If the government is so concerned about a vacancy at the bank, it should have been both (a) making the case for Mr. Muto persistently and loudly starting months ago and (b) exploring alternatives with the DPJ. The LDP is always talking about urgent national problems and yet now, when faced with one, it seems that the government has no plan B. It's Muto or nothing. Is there really only one man qualified to serve as BOJ president? If so, Japan must be in even worse shape than I thought.

So the HR will pass the Muto nomination again this afternoon, daring the HC to once again reject it. If it does, will the government nominate Mr. Muto a third time? And will the DPJ suffer political consequences as a result of holding fast in its opposition to Mr. Muto?

The looming empty chair "crisis"

Following the government's formal nomination of Muto Toshiro for the post of BOJ president on Friday, the LDP launched a war of words over the weekend to paint the DPJ as irresponsible and pressure it to accept Mr. Muto to prevent a vacancy at the BOJ.

On Saturday, Tanigaki Sadakazu, LDP policy chief and former finance minister, criticized the DPJ's argument that a former MOF bureaucrat is unfit for the BOJ presidency by stating that there are many examples of European central bank presidents who came out of finance ministries.

Ibuki Bunmei, LDP secretary-general, took a different approach on Saturday. Speaking in Sapporo, he trotted out the well-worn line cautioning the DPJ about "misusing" its power: "The DPJ obtained the power of the majority in last summer's Upper House election. It is now being tested whether it will be an 'upstart in power' or whether it will use its power correctly on behalf of the nation. We hope that from the start of the week they will not abuse their power and will solemnly choose to exercise good sense."

Mr. Ibuki also appeared on NHK on Sunday to declare that Mr. Fukuda has rejected the DPJ's offer of face-to-face talks in exchange for the government's nominating another candidate in place of Mr. Muto.

Ota Akihiro, head of Komeito, has also criticized the DPJ for its inflexibility.

The DPJ has responded blow for blow. On Saturday, Hatoyama Yukio, the DPJ secretary-general, criticized Mr. Muto's appointment as an "amakudari appointment," and made the offer that was subsequently rejected by Mr. Bunmei. Kan Naoto, the DPJ's acting president, emphasized on NHK Sunday that the DPJ's position is unchanged — there will be no compromise on Mr. Muto.

It is possible to overstate the importance of a vacancy at the Bank of Japan. Both politicians and commentators have assumed that because of the global financial situation, a vacancy at the Bank of Japan would be a disaster. I don't quite buy this argument. As Wolfgang Munchau argues in the FT, "For as long as this financial crisis persists, interest rates will be determined by toxic market conditions, not central bankers. Among the various channels through which monetary policy affects the real economy, the credit channel is one of the most important. If real-world interest rates are determined independent of a central bank’s monetary policy, the effect of monetary policy on economic growth is correspondingly reduced."

Of course, Munchau does not argue that central banks are totally irrelevant — nor do I — but the practical impact of a failure to nominate a new BOJ chief by March 19 is not particularly great. Even the symbolic impact of a BOJ vacancy on the markets may be overstated: there are other, more enduring factors determining the flow of money in and out of Japan at the moment.

As the weekend's rhetoric makes clear, this battle is a preview of a general election campaign. Both the LDP and the DPJ have imposed their "narratives" on this issue. Can you really trust the DPJ with the government, the LDP asks. Look at the LDP, the DPJ says. In bed with the bureaucrats. Not much room for a compromise here, particularly because each side has escalated, much like in the fight over the MSDF refueling mission. In particular, there is no easy way for the DPJ leadership to back down, because Mr. Ozawa's fiercest opponents within the DPJ are also the fiercest opponents of the Muto nomination.

The LDP acts to shift the blame

In a transparent attempt to shift the blame for the Bank of Japan "crisis" from the government to the DPJ, today the Fukuda Cabinet officially submitted its nomination of Muto Toshiro to be the next BOJ president. If a Mr. Muto or another candidate is not confirmed within the next twelve days, the post will be vacant.

Without the agreement of the DPJ-controlled HC, any nomination is a non-starter.

The Fukuda government seems increasingly desperate to see this battle concluded in its favor, and to that end is pursuing two strategies simultaneously. One strategy calls for Mr. Fukuda to discuss the issue with Mr. Ozawa in the hopes of reaching an agreement. Yamaoka Kenji, Ozawa loyalist and DPJ Diet strategist, nixed this idea completely on behalf of Mr. Ozawa, suggesting that the DPJ will consider Mr. Muto's nomination itself and then answer the government. The other strategy is, of course, what the government did today: nominating Mr. Muto in an attempt to place the burden for a vacancy on the DPJ.

According to Mainichi, the DPJ recognizes that the government's move has put it in a tough position, as the party neither wants to bear the blame for a vacancy nor roll over for the government. We may be reaching the point at which the DPJ's latest wave of momentum dissipates — a point made by Jun Okumura here. Although the DPJ has indicated that it will not consent to Mr. Muto's nomination, the possibility of an about-face remains.

It will ultimately depend on Mr. Ozawa's read of the political situation. If Mr. Ozawa reckons that the domestic political consequences of opposing the government's nomination are slight, the DPJ will without question say "damn the markets" and reject the nomination. If he concludes that obstructing Mr. Muto's elevation to the BOJ presidency will play into the LDP's efforts to construct a general election narrative that paints the DPJ as little more than a noisy rabble unfit for government, the DPJ may step back from the brink of obstruction, make some show of having vetted Mr. Muto and declared him not tainted by his MOF past, and move on to the next issue. Doing so would entail not just a defeat for the DPJ, but also move the DPJ closer to an open fight over the leadership of the party, as anti-Ozawa DPJ members — some of whom have been leading critics of Mr. Muto's nomination on the basis of his MOF past and concerns for BOJ independence — may react by taking their desire to see Mr. Ozawa unseated in the September party leadership election out into the open.

This situation is typical of the DPJ's strategy since winning the HC election. Faced with what appears to be an opportunity to undermine the government, the DPJ throws all of its energy into exploiting it, only to overextend itself and leave itself vulnerable to public backlash and charges of fecklessness from the government.

A large segment of the public may be ready to vote against the LDP in a general election, but I reckon an even greater segment of the public wants the government and the Diet to work on their behalf.

Regardless of the resolution of this "crisis" — I use the quotation marks because aside from a slight shudder in the market, the world will not end if there is a vacancy at the BOJ — one thing is certain: it will prompt a new wave of articles in the foreign press lamenting the consequences of Japan's supposedly byzantine politics.

The DPJ keeps pushing

With the Fukuda cabinet's popularity in free fall thanks to the fallout from the Atago incident, the DPJ's stance on the government's nomination of Muto Toshiro to be the next BOJ president has become decidedly less ambiguous. The DPJ has indicated that there is no chance of its consenting to Mr. Muto's nomination.

In response, Ibuki Bunmei, LDP secretary-general, has criticized the DPJ for "playing politics" with the nomination. Playing politics. As if the DPJ is in the wrong for exercising its prerogatives as the largest party in the House of Councillors and forcing the LDP to respect the opposition.

Mr. Ibuki, the game has changed. Through a series of accidents, the DPJ is once again in a position to criticize the government for its poor handling of just about every issue it faces. This is the approach emphasized by Ozawa Ichiro, who spoke of the government's breach of trust in the relationship between LDP and DPJ, and Yamaoka Kenji, who suggested that if there is a vacancy at the BOJ, it will be the government, not the DPJ that bears the blame. The government, the DPJ reasons, will be the anger of the global markets for failing to do whatever necessary to placate the DPJ and ensure a smooth transition at the BOJ.

The DPJ may be right, because, after all, among those whose voice actually matters when it comes to forming governments, I imagine that the LDP's claims that the DPJ is "playing politics" with the BOJ transition will stick less than the opposition's claims that the government has mishandled every issue it has confronted and can't even tackle corruption and malfeasance within the bureaucracy.

Another turn may be waiting in the wings, but it looks like the DPJ has played this issue right: from the start it focused on the process of HR-HC "dual-key" nominations rather than specific nominations, preserving its options to cooperate or resist depending on the public mood. The government, so certain that it would get its man, only now seems to be preparing alternative nominees (Yamaguchi Yutaka, a former BOJ vice president, has been suggested) that might placate the DPJ.

Welcome to the divided Diet, Mr. Fukuda (and Mr. Bunmei, et al).

Peace in our time (well, not really)

The LDP and the DPJ have come to an agreement on the process for approving candidates for positions that require HR-HC consensus. The terms of the agreement, the result of negotiations between the two parties' Kokutai chairmen, calls for separate hearings for candidates in the HR Committee on Rules and Administration and the HC Committee on Rules and Administration. Nominations will first go to a joint committee of representatives from both houses, before being submitted to the two houses.

One point of contention was the timing of the release of the records from the hearings. The LDP wanted them sealed until the end of a nominee's term. The DPJ rejected this arrangement, and the final agreement calls for the records to be released after a nominee is confirmed.

However, Yamaoka Kenji, the DPJ's representative in the talks, cautioned that this agreement does not necessarily mean that the DPJ will agree to confirm Muto Toshiro, the government's candidate for the BOJ presidency. The LDP continues to hope that the DPJ will see reason on the BOJ succession. With the new rules in place and the DPJ leadership closing ranks behind Mr. Ozawa, the DPJ will likely sign off on Mr. Muto — although it will be curious to see the hearing transcripts when they're released, especially in the HR, where Sengoku Yoshito, Ozawa rival and opponent of Mr. Muto's appointment, sits on the Rules and Administration Committee.

This agreement should be applauded: the DPJ held its ground on taking an active role in joint confirmations, the BOJ executive will probably not be vacant at a critical period in the global economy, and the two parties showed that fears of gridlock are overblown.

More trouble on the BOJ succession

In a meeting between Oshima Tadamori and Yamaoka Kenji, the Diet strategy chairmen of the LDP and DPJ respectively, the two parties came closer to an agreement on joint personnel decisions. They discussed a proposal that envisions an "expanded representatives committee" of twenty from both houses that will question government-nominated candidates about their policy positions in closed hearings, although the records of the hearing will be released once a successor candidate's term ends.

However, Mainichi reports that the question of the BOJ succession is becoming the subject of a growing struggle within the DPJ between pro-Ozawa and anti-Ozawa forces. At the same time that the DPJ leadership is struggling to reach an agreement with the LDP on how to vet nominees, Mr. Ozawa is fighting a rearguard battle within the DPJ. Edano Yukio, a former head of the party's policy bureau, and Sengoku Yoshito, the head of the party investigatory subcommittee handling joint appointments, are opposed to the nomination of Muto Toshiro due to fears for the independence of the BOJ from fiscal authorities. Mainichi suggests that this dispute is becoming the first major power struggle since Mr. Ozawa's aborted resignation last November.

Mr. Ozawa, not surprisingly, fired back, reminding Mr. Sengoku that his subcommittee's remit is limited to reporting to the party executive on the candidate under consideration. Slightly to my surprise, Kan Naoto and Hatoyama Yukio, Mr. Ozawa's fellow executives, closed ranks behind him, reminding the dissenters that the final decision is theirs.

Wrapped up in this issue is the question of the September leadership election. Mr. Ozawa is also facing pressure from Okada Katsuya, a potential successor to Mr. Ozawa, who has said that he feels "uncomfortable" with Mr. Muto's nomination for the same reasons as Messrs. Sengoku and Edano. Mainichi warns that should Mr. Okada link up with the other dissenters, "it could quite possibly influence the outcome of this September's party leadership election." For the moment, however, Mr. Okada hasn't completely nixed the Muto nomination, at least according to Fujii Hirohisa, a channel of communication between Mr. Okada and Mr. Ozawa. And Mr. Ozawa's reelection looks increasingly assured, as a series of party leaders have come out in support of Mr. Ozawa's remaining the head of the party.

With the party leadership united against letting Mr. Sengoku's subcommittee call the shots on the nomination, it is unlikely that the dissenters will get their way. The BOJ succession will proceed, but a bit less smoothly than the government and the markets would have hoped. I just wonder why Mr. Ozawa gave them an opening in the first place. And I wonder how Mr. Ozawa, not known for being charitable with those who dissent from his course of action, will deal with his rivals. (Or has control of the House of Councillors tied Mr. Ozawa's hands in dealing with intraparty rivals, as in the case of Ōe Yasuhiro and other dissenters on the special road construction fund?)

The DPJ continues playing hard to get

As I wrote on Monday, the DPJ may ultimately come around to Muto Toshiro, the government's candidate for the presidency of the Bank of Japan, but it will not give in to pressure — and it will make its decision on the nomination on its own terms and at its own pace.

It increasingly looks like the DPJ's pace will keep the government and the markets guessing into March.

On Tuesday, Ozawa Ichiro backed away from previous remarks suggesting that he will defer to the judgment of the DPJ's investigatory subcommittee on joint personnel decisions. Instead, a committee of DPJ executives and Diet strategists will decide on personnel. The publicly stated reason for the DPJ's foot-dragging remains Mr. Muto's service in the Finance Ministry. Building on that, the DPJ's Financial and Monetary section announced a standard of evaluation for candidates for the BOJ presidency, including (1) independent from the government and the Diet, (2) knowledgeable about the domestic and international financial environments, (3) crisis management skills, and (4) skills for communicating with the market.

Again, I doubt that the DPJ will ultimately veto the Muto nomination, but that doesn't mean the party won't make Mr. Muto and the LDP jump through hoops to get him confirmed.

The headline says yes, but the body says not yet

The FT's David Pilling reports that the DPJ will accept the government's nomination of Muto Toshiro, currently the BOJ's deputy governor, to serve as Fukui Toshihiko's successor as BOJ governor.

At least that's what one might think from the headline: "Japanese opposition to accept new bank chief."

The body of the article, however, indicates that while the DPJ has softened its opposition, it has yet to assent officially to the government's nomination.

In fact, Ozawa Ichiro, DPJ president, insisted over the weekend that the DPJ's position is "blank" — he will respect the decision of the party's investigatory subcommittee on joint personnel decisions. Sengoku Yoshito, the subcommittee chairman, emphasized the need for a proper debate on Mr. Muto's elevation to the bank presidency.

It's perhaps a little hasty to assume that Mr. Muto is set to assume control next month. I expect that the DPJ will ultimately assent — as the FT article makes clear, the DPJ's objections are flimsy — but I suspect it will not do so until it has made its point to the government about the need to share power properly, especially in an area like this in which the constitution mandates a role for the House of Councillors.

UPDATE: Definitely read Jun Okumura's post on this debate.