Central bank's credibility rate follows money rates down
A 'born-again' governor and bureaucrats come under fire because of conflicting policy statements.
By TATSUYA FUJII
Shukan Asahi
The Bank of Japan's policy board members may be led by a born-again Christian but the board is not working as well as it should, say observers of the central bank's performance.
"This doesn't make sense," said one, referring to an apparent policy contradiction in two documents it released recently.
One of the documents, issued following the bank's Feb. 12 board meeting, said in effect the BOJ would expand the money supply by purchasing government bonds instead of cutting interest rates, already at rock bottom.
The other--a summary of the minutes of the same meeting, published about a month later, March 17--said the board had rejected the idea of bond-buying and decided instead to bring down short-term money rates almost to zero.
The policy board, the highest decision-making body of the Bank of Japan, comprises the governor, two deputy governors, and six other members, including industry representatives and academics.
The Feb. 12 meeting decided to let short-term interest rates for inter-bank transactions drop from about 0.25 percent to 0.15 percent. The statement issued later in the day said: "The Bank of Japan will supply plenty of funds and thereby expand the money supply."
One confused BOJ-watcher said: "Based on this statement as well as the governor's news conference, newspapers reported that the central bank would relax its quantitative controls. But the minutes say the policy board rejected this option."
Interest-rate manipulation is the central bank's traditional policy tool. During the recent economic slump, the BOJ has followed an easy-money policy by cutting the official discount rate and guiding short-term money rates lower.
With interest rates already near zero, though, the bank's interest-rate policy is reaching the limit. So speculation has been rife that it will shift to "quantitative relaxation," or outright bond purchasing, as a way of expanding the money supply.
Earlier this year, massive bond issues raised long-term interest rates above 2 percent, threatening to choke off economic growth. So the United States, in tandem with Tokyo, worked on the Bank of Japan to buy up bonds, so pumping more money into the system.
Would not budge
But the central bank would not budge, saying that this action would stoke inflation. According to the summary of the Feb. 12 minutes, only one board member proposed "quantitative relaxation" with the rest opposed. Yet the statement issued afterward hinted strongly that the central bank would embark on a course of bond-purchasing.
At a news conference later the same day, the following exchanges took place between reporters and Governor Masaru Hayami.
Reporter: Are you saying the bank will adopt a policy of quantitative relaxation?
Hayami: I hope the money supply will expand.
Reporter: Exactly what is your objective? Is it to cut interest rates further? Or is it to supply plenty of funds (quantitative relaxation) and let interest rates move accordingly?
Hayami: It is not a question of one or the other.
Unconvinced, one reporter pressed him further: "The statement says the central bank will supply plenty of funds. Does this mean you are shifting to a policy of quantitative expansion?"
The governor, apparently mishearing juntaku (plenty) for jutaku (housing), said: "As you know, the number of housing starts has been increasing." Neither reporters nor bank officials present dared bring this mistake to his attention.
Next day, Feb. 13, Nihon Keizai Shimbun carried a Page 1 story saying the Bank of Japan was headed for "quantitative monetary relaxation."
Sankei Shimbun carried a similar story, saying that in choosing quantitative relaxation the central bank had made a "difficult choice." Other mass-circulation dailies were less explicit.
Money supply growth in February was the slowest since last July, according to figures released March 16. Two days later, long-term interest rates dropped to 1.68 percent on reports of "quantitative relaxation."
The Feb. 12 statement--which strongly hinted at a substantial shift in monetary policy--had been approved by all nine board members, even though the minutes summary shows eight of the nine members opposed the change.
Why? "Some members are said to have raised questions about the statement," revealed a source close to the policy board. "Bank officials who had drafted it presented the paper when all members were tired after long hours of discussion. So it got approved quickly.
Another source said: "I don't think the statement accurately reflected the discussions that actually took place," and suggested bureaucrats might have done some embellishment. The source added that the central bank was intent on improving the way such official statements were prepared.
A BOJ official acknowledged that statements released by the central bank were written by members of its planning department.
Elitist self-image
"They think they are the elite now that the sales department has been reorganized since wining and dining scandals came to light," he said.
"They think they are the ones moving the policy board. They work out ways of dealing with particular problems, such as deflation, and then only do they give reference material to board members."
"This time around, the planning staff and other bureaucrats felt pressure coming from the government and elsewhere (to buy up bonds)," he continued. "So they likely wrote a statement that would be externally acceptable."
Under the old Bank of Japan Law, the policy board was called the "sleeping board" because, critics said, it rubber-stamped decisions made at central bank executive meetings.
In terms of the amended law which took effect April 1 last year, the board was strengthened and repositioned as the central bank's sole decision-making body. But sources close to the bank say the board remains under the thumb of bureaucrats.
Hayami, 73, the bank's governor and formerly chairman of a trading conglomerate, has come under fire, from within and without the BOJ, for his conduct of monetary policy.
An economic journalist, commenting on the Feb. 12 decision to steer short-term money rates lower, said: "He had been under pressure from the United States and the (Japanese) government, so it was a last-ditch effort to stave off that pressure. The timing was bad."
"Another problem," he said, "is that board members who had opposed interest-rate cuts changed their minds quickly and threw their support behind the governor."
Hayami created a stir last October by saying Japan's top banks were "dangerously" undercapitalized. The statement, at a news conference after a meeting of Group of Seven finance ministers and central bankers in the United States, hurt market confidence in the banks and made it more expensive for them to borrow dollars on overseas markets.
"Before he gives a news conference we often ask him to keep silent on certain matters. But he says what he likes, ignoring our warnings," said a disgruntled BOJ official who did not want his name used. "He does not really understand new policies; I think he is getting old. The amended law makes it impossible to fire the governor. I wonder whether that is a good thing."
A joke circulating among central-bank employees disappointed with Hayami goes something like this: "Governor Hayami doesn't have to worry about his mistakes. Why? Because he is a Christian: He can get his mistakes forgiven in church."
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