Bank of Japan Governor Fukui's Departure Set to Leave Power Vacuum

It’s the end of the line for Bank of Japan Governor Toshihiko Fukui, who ends his five-year tenure on Wednesday. Fukui was best known for putting an end to zero interest rate policy (ZIRP) in July 2006 with a 25bp rate increase. The move was monumental at the time as a symbol of the end of the economy’s long battle with deflation. The Bank of Japan enacted another 25bp rate hike in February 2007, and as fears of asset inflation stirred throughout the economy, Fukui kept hopes for another rate increase alive for much of 2007. However, as the liquidity crunch takes a severe toll on the global financial markets and Japanese inflation appears to be purely the result of volatile food and energy places, the Bank of Japan is now considered to hold a far more dovish lean and leaves the next central bank governor in an unsavory position.

Bank of Japan Deputy Governor Toshiro Muto was initially nominated to succeed Fukui, but was subsequently rejected by Parliament last week amidst concerns that the central bank’s independence would be threatened by his close relationship with the government. Next up for nomination was Koji Tanami, the current governor of the government-backed Japan Bank for International Cooperation (JBIC). Like Muto, Tanami was rejected as Democratic Party of Japan Secretary General Yukio Hatoyama said the candidate lacked sufficient experience in international financial markets.

It appears that there is one candidate that stands a better chance than Muto and Tanami: Masaaki Shirakawa. Shirakawa was a former Bank of Japan Executive Director and was recently approved by Parliament to serve as one of the bank’s new Deputy Governors. However, his tenure as Governor would only be temporary as the government looks to approve a more permanent candidate.

Meanwhile, the Democratic Party said they would back a current Bank of Japan board member, Kiyohiko Nishimura, for the other deputy governor position when parliament votes on Wednesday. Nevertheless, he will likely be the only one approved for a position, and the lack of a permanent Governor for the Bank of Japan could hurt investor sentiment in the country, especially in the midst of turbulence in the global financial markets.
If the Japanese government indeed establishes no consensus on a feasible, full-time candidate for the position, the Japanese markets could see volatile price action as a power-vacuum occupies the head spot of the Bank of Japan. Overall, though, the response of the Japanese yen will be minimal as risk aversion trends remain the major driver of the currency’s movements. As a result, those holding positions in pairs like USD/JPY and GBP/JPY should be more concerned about the status of carry trades in general.

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Written by Terri Belkas, Currency Analyst, [/B][I]Forex Capital Markets LLC,[/I]
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