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.

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