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New BOJ chief sees slow growth ahead

New Bank of Japan Governor Masaaki Shirakawa said growth would keep slowing as rising oil and commodity prices weigh on the world’s second-largest economy.

“Higher energy and raw materials costs are causing the economy to slow now,” Shirakawa, 58, told reporters in Tokyo yesterday after the bank cut its economic assessment for the first time in four months and kept the key interest rate at 0.5 percent. “The mechanism of production, income and spending is weakening, but it’s not as if it’s fallen apart.”

Shirakawa’s appointment was approved by parliament yesterday, ending the first leadership vacuum in more than 80 years and following weeks of wrangling between Japanese Prime Minister Yasuo Fukuda and opposition leaders over whether to select central bankers with backgrounds at the Ministry of Finance.

He assumes the post just in time to attend this week’s G7 meeting of finance officials in Washington.

“The public is getting tired of this childish political battle,” said Tomoaki Iwai, a political science professor at Nihon University in Tokyo. “It reveals both the divisions within the DPJ [Democratic Party of Japan] and Fukuda’s inability to realize the political consequences of his actions.”

Hiroshi Watanabe, the government’s nominee to replace Shirakawa as deputy, was rejected by the upper house of parliament because he worked at the ministry.

DPJ members, who control the upper house, say appointing former finance ministry officials on the policy board would threaten the bank’s independence and amount to parachuting former bureaucrats into government posts.

Chief Cabinet Secretary Nobutaka Machimura said that it’s good for central bankers to have finance ministry experience because they must coordinate monetary and fiscal policy.

He also rejected an assertion by DPJ Secretary General Yukio Hatoyama that Watanabe’s appointment would amount to amakudari, or reserving top government posts for former bureaucrats.

“I don’t understand it. Calling this amakudari is nonsense,” he said.

Shirakawa, who has been deputy since March 12 and acting chief since Fukuda failed to appoint a successor to Toshihiko Fukui a week later, indicated he’s flexible about policy.

“It’s not appropriate to have any preconceptions about the direction of monetary policy right now,” Shirakawa said.

The economic outlook is filled with uncertainties that could quickly subside, the governor said, adding that he expects growth to eventually pick up.

“Mr. Shirakawa is probably succeeding Mr Fukui’s slightly hawkish line, but he certainly has to be very flexible in response to changing economic conditions,” said Tomoko Fujii, head of economics and strategy for Japan at Bank of America Corp in Tokyo. “The economy is set for a full-fledged slowdown.”

To assess the levels of the country’s borrowing costs, it’s necessary to look not only at short-term interest rates but also longer-term rates, Shirakawa said.

Companies have become “cautious,” the central bank said yesterday, a week after its Tankan survey showed confidence among large manufacturers fell to a four-year low and businesses plan to reduce investment.

Attention needs to be paid to developments in other economies, global financial markets and the effects of high energy and raw materials prices, it said.

Shirakawa worked at the central bank for 34 years before leaving to teach economics at Kyoto University in 2006. He earned a master’s degree in economics from the University of Chicago and worked at the central bank’s New York office between 1994 and 1995.
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