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World's No. 2 Economy Has Vacancy at Top

By Blaine Harden
Washington Post Foreign Service
Wednesday, March 19, 2008 9:17 AM

TOKYO, March 19 -- Imagine turmoil in financial and currency markets, with skidding stocks and a soaring currency that threatens an export-dependent nation. Then imagine that the nation's central bank -- the one institution capable of responding quickly in a global financial crisis -- has no Greenspan, no Bernanke, no boss.

This, in fact, is Japan, the world's second-largest economy.

The term of the current governor of the Bank of Japan, Toshihiko Fukui, expires Wednesday. But the government cannot agree on a replacement, due to an intractable power struggle in the Japanese parliament.

The stalemate, which Japan's financial world has anticipated and fretted over for months, has suddenly become a national embarrassment, an international worry and a political millstone for everyone involved.

"Given what is going on in financial markets, this does not inspire confidence in Japan," said Robert Feldman, director of economic research for Morgan Stanley in Tokyo. "It was a serious matter months ago, and it is even more serious now."

Prime Minister Yasuo Fukuda's first two choices to run the central bank have been rejected by the opposition Democratic Party of Japan, which has veto power over the nomination because it controls the upper house of parliament.

The opposition argued that the first nominee, Toshiro Muto, a deputy bank governor who was formerly the top career officer in the Finance Ministry, was too close to the ruling party and would not be independent enough to manage monetary policy. He was rejected last week.

Fukuda's hastily named second choice -- whose name emerged only on Tuesday -- also displeased the opposition, and he was voted down on Wednesday. He is Koji Tanami, head of the Japan Bank for International Cooperation and, like Muto, was formerly a top civil servant in the Finance Ministry.

In the upper house on Wednesday, the opposition voted to reject Tanami, saying he lacks experience in international financial markets. "Since we rejected Muto, it would be hard to find any reasons to support Tanami," Kenji Yamaoka, an opposition leader, told reporters.

The Bank of Japan's independence is considerable but not as complete as that of the U.S. Federal Reserve. In the 1990s, when Japan's bubble economy burst, banking law was changed to strengthen the bank's autonomy. Still, the bank is legally required to maintain contacts with the government and have "mutually harmonious" policies.

The inability to agree on a central bank boss is part of a broader, long-playing paralysis in Japan's government that has angered voters and reduced Fukuda's support to 34 percent, the lowest level since he was named prime minister last September, according to a poll by the Yomiuri newspaper.

The popularity of the opposition, too, has taken a beating because of the central bank mess.

The paralysis comes as Japan appears to sliding into recession and the yen this week rose to its highest level against the dollar in nearly 13 years -- an alarming development for a country that has grown rich off exports.

Stocks of major exporters such as Toyota and Sony have declined sharply.

Western financial analysts complain that Japan's government is returning to old bad habits of excessive regulation, onerous restrictions on foreign investment and selection of top officials based on party loyalty and seniority.

Fukuda, 72, a longtime party elder, could be said to have come into power by that route. The election he won last fall was only within the ruling party, which has governed Japan almost without interruption since World War II.

The party selected Fukuda to replace Shinzo Abe, who had won a nationwide election but quit suddenly after less than a year because of financial scandals and a strong public perception that he was inept.

When Fukuda became prime minister, public expectations were high that he would restore competence and finesse a way around the opposition's control of the upper house of parliament.

But he has not come close to finding a way around that roadblock.

"He is simply not the leader type," said Tomoaki Iwai, a politics professor at Nihon University in Tokyo.

Morgan Stanley's Feldman said Fukuda has fallen back on an old party pattern of picking appointees based primarily on their affiliations rather than qualifications.

As for Tanami, Fukuda's newest nominee to lead the central bank, Feldman echoed other financial analysts here by saying that he appears to have few of the qualifications expected of a central bank boss.

"From his personal history, I see no experience in macro- or international finance, or banking or securities," Feldman said. "I have seen no contributions to debate on any key macro- or central-banking issues, and no involvement with potential counterparts" in the world's other central banks.

If a leader for the bank cannot be found before the current one leaves office Wednesday, a deputy governor is expected to become acting head of the bank.

Special correspondent Akiko Yamamoto contributed to this report.

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