Japan's main opposition party is likely to oppose the idea of Toshiro Muto becoming the country's next central bank governor because he is a former finance ministry official, a leading party figure said on Monday. Muto, currently a deputy governor, is widely tipped to take over when current governor Toshihiko Fukui's term of office expires in March.
But the stance of the Democratic Party of Japan has assumed new importance after the government lost control of the upper house of parliament in elections at the end of July, giving opposition lawmakers the power to block a government nominee. Takeaki Matsumoto, the party's policy chief, told Reuters in an interview that no former finance ministry bureaucrat should succeed Fukui.
"There is no reason for us to approve the appointment of a person who came from the finance ministry," Matsumoto said, adding the party took this view because it wanted to ensure the independence of the central bank.
The Democratic Party is an amalgam of defectors from the ruling Liberal Democratic Party, former socialists and young conservatives, which makes it difficult to know whether policy stances made by senior officials such as Matsumoto will be carried through to party policy. However, Matsumoto noted his party had opposed the appointment of Muto as a deputy BoJ governor in 2003.
The central bank has been at the centre of attention in Japan since it started raising interest rates from zero last year, with some officials fearing it will raise rates too fast and choke off economic growth, sending Japan back into a deflationary spiral.
Japan normally picks as its central bank governor an official with either extensive BoJ or finance ministry experience. Matsumoto said it was appropriate for the BoJ to try to normalise interest rates by raising them from the current 0.5 percent, the lowest in the industrialised world. "I understand there's a need to correct interest rates. We need to cautiously determine the timing and extent of rate hikes but as a direction interest rates should be raised," he said.
"The major reason why interest rates should be normalised is that various things may have been distorted in the abnormal state of zero interest rates," Matsumoto said, citing problems such as foreign exchange rates.
The weak yen has been used as a funding currency for carry trades, where investors borrow low-yielding currencies such as the yen to buy assets in countries that offer higher returns.
Supportive views for rate hikes from the newly powerful opposition could prompt speculation that the Bank of Japan may find it easier to raise rates, but the BoJ has reiterated that it bases its decisions on the economy, not politics.
The market expects the BoJ to raise rates to 0.75 percent at its next review later this month, although the global credit squeeze that has hit equity markets has caused a few analysts to suggest the central bank may wait. The opposition, led by the Democrats, seized control of Japan's upper house in an election late last month, enabling it to delay legislation and block the appointment of the central bank governor.
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