2008; Volume 04, Number 10

of the

Japan Considered Podcast

[Listen to the audio file by clicking here]

Clink Links Below for Today's Topics

Introduction
Dr. Ed Lincoln on the Economic Significance of Bank of Japan Governorship
The Interview
Japan’s Response to China’s Tibet Problem
Concluding Comments

Good Morning! From Beautiful Spring Valley. In the Midlands of South Carolina. Today is Friday, March 21st, 2008. And you are listening to Volume 04, Number 10, of the Japan Considered Podcast.

Introduction

Thanks for dropping in again this week. I’m Robert Angel, creator and maintainer of the Japan Considered Project. And creator and host of this Podcast. Speaking of the Japan Considered Project, click on over to the website. At www.JapanConsidered.com. And have a look through. It’s chuck full of information in English that I hope you’ll find useful. A number of you have written in to mention the links there to convenient statistical data on Japan, for example.

Oh, and during the past few weeks, several of you have written in to ask about the interviews. Specifically, when will the next one be available! These interviews have been a popular feature of the Japan Considered Project since the beginning. Sixteen of them are up and running so far. I’ll put a link in the transcript to the Interviews site. But the last one’s nearly a year old! Well, it’s just a question of time. And that’s been in short supply around here lately. They take a surprisingly long time to record, transcribe, edit, and produce. I hope to be adding more in the near future. So, just check back from time to time.

Japan’s political world this week is a whirl of activity and confusion. All of it interesting. But most of it meaningless. Meaningless, that is, beyond the game of who gets to sit in the big chairs. As we considered last week, the possibility of a change in party fortunes has driven Nagata-cho’s political operatives into a veritable frenzy. It’s been like watching an amateur knife fight on a poorly-constructed river raft. With participants too excited and worried about falling off to notice their raft drifting toward the rapids! I’ll spare you the “inside baseball” details of all this. Though I can’t help watching myself! Better than TV soap operas, I guess….

Rather, this week we’ll begin with an update on the Bank of Japan governorship. With useful comments from Dr. Ed Lincoln. Ed has an interpretation this issue quite different from the one I’ve been presenting. So it’s especially useful.

Then we’ll look briefly at Japan’s relations with Mainland China. With particular focus on Japan’s official reaction to the Tibet issue. Something that throws a bit more light on how Japan conducts its international relations in the 21st century.

Dr. Ed Lincoln on the Economic Significance of Bank of Japan Governorship

We considered this in some detail last week. Leaving it with Upper House rejection of Deputy Governor Toshiro Muto candidacy, and Lower House passage of the ruling coalition’s proposals. Since then, Prime Minister Fukuda and other ruling coalition representatives have continued to ask the DPJ to join “consultations” on the nominations. Knowing full well DPJ leaders can’t go near the LDP without raising the suspicions of their rank-and-file members.

Japan’s political press over the weekend reported a new proposal from the ruling coalition. An extension of Governor Fukui’s term of office. Extension until a candidate acceptable to both the LDP and DPJ could be named. But as quickly as this proposal was reported, DPJ spokesmen rejected the idea.

Then on Tuesday the 17th, one day before expiration of Governor Fukui’s term, the ruling coalition proposed Koji Tanami as Fukui’s successor. Tanami now serves as governor of the Japan Bank for International Cooperation. But the majority of his bureaucratic career was served in the Ministry of Finance. A very successful MOF bureaucrat, in fact. He even rose to the top bureaucratic spot of administrative vice minister in January 1998. In other words, Tanami’s bureaucratic career was quite similar to that of Toshiro Muto. Similar, at least, in the ways that made Muto unacceptable to the DPJ. So, of course, the DPJ had to reject Tanami as well. And they did.     DPJ spokesmen announced almost immediately that they intended to vote against Tanami’s nomination. For the same reasons they voted against Muto.

This is baffling. Not the DPJ opposition to Tanami’s nomination. But the ruling coalition’s selection of Tanami after Muto’s rejection! What could explain it? Other than the ruling coalition using the Bank of Japan governorship to put the DPJ leadership in a difficult position? We considered that possibility last week. One remote possibility might be that the ruling coalition acted on the basis of bad information. That they’d received credible information suggesting the DPJ would accept Tanami. But when his name was announced, the DPJ leadership reacted negatively. Possible? Yes. But not very likely.

Last week I asked if a vacancy in the Bank of Japan governorship had any real economic significance. Beyond risking criticism from foreigners. Implying, obviously, that it might not matter much beyond the symbolism. Well! Not everyone shares that view. One person who disagrees is a frequent contributor to the Japan Considered Podcast. Dr. Edward Lincoln, Director of the NYU Stern School Center for Japan-U.S. Business and Economic Studies. I caught up with Ed via SkypePhone yesterday. And here’s what he had to say ….

Dr. Ed Lincoln’s Thoughts on the BOJ Governorship

Transcript of Ed on Bank of Japan Governorship

EL: Hello

RCA: Hello, Ed. This is Bob Angel from the Japan Considered Podcast. How are you?

EL: Hi, Bob. Good to hear from you.

RCA: Thanks for agreeing to come on yet again. It’s only been a couple of weeks now. To talk to us some more about economic points concerning political happenings in Japan. We’ve recently experienced quite a bit of fluster and concern in Japan over the governorship of the Bank of Japan. And, in fact, the governorship itself is vacant. Does this really matter?

EL: Absolutely. Particularly at the present time.

RCA: Why so?

EL: Well, as we all know, there’s been a great deal of turmoil in financial markets. Predominantly in the United States. But there have been spill-over effects elsewhere. The stock market is way down in Japan, Europe, elsewhere. At times of financial turmoil, it is critical that central banks be, first of all, prepared to make changes in monetary policy. And secondly, to communicate and coordinate with other central banks around the world. Japan is not in a position to do that right now because the governorship is actually vacant.

RCA: But does the governor him or herself actually have that much to do with this coordination? Isn’t that all done by the staff?

EL: Well, sure. But it’s just like the United States. We have a board of governors. We have a policy panel that makes decisions on interest rates. But the governor has a disproportionate voice in all of this. And that’s true in Japan as well. Plus, as we all know, even in Japan with its strong bureaucracy, at a time when critical decisions need to be made. Even if the staff is very influential, they need someone at the top to take the responsibility, and either say “yes” or “no” on particular decisions. So, when that person’s not there, there’s a tendency to simply postpone those decisions until the vacancy is filled.

RCA: Now, that’s interesting. Whatever happened to consensual decisionmaking, that we all know is the way Japan works? It seems as though you are describing a system in which the governor, in this case, the top person, is actually important in the decision process.

EL: Sure. Well, certainly in consensual decisionmaking, even if that exists. And people can argue about that. One starts off with differences of opinion that have to be discussed. The governor is certainly one of those players. And is a more powerful in that debate. And, again, even if it is a consensus decision, he has to ratify it. So it’s hard to get that ratification when the person just isn’t there.

RCA: Assume the responsibility for it.

EL: To assume the responsibility. Particularly, if you think about it this way, everyone knows there will be a governor some time, relatively soon. One hopes. And there’d be a reluctance to make decisions that might go against what  whoever the person is who comes in would want. So it’s just better to wait. “Let’s just wait. And once we’ve got our person in place, then we’ll have the discussion. We’ll reach a conclusion. And that person will ratify it.”

RCA: Speaking of that, if I understand correctly, Deputy Governor Shirakawa now is the acting governor? Is that correct?

EL: Yes. In the absence of the governor, the deputy governor, or one of the deputy governors, takes over. And I believe it is Shirakawa who’s occupying that position now. My understanding is that people have a considerable amount of respect for him.

RCA: What, Ed, are some of the specific issues that you see coming up that might be problematic without an incumbent governor?

EL: The main issue facing Japan right now is, like the United States, they appear to be staring at an on-coming recession. Normally at such times a central bank will cut interest rates. Now, Japan’s interest rates are quite low. But they’ve been raised a couple of times over the past year. So there is, at least, a little bit of room to lower interest rates, or to try to expand the money supply more rapidly. Or something of that sort. But, again, that would be a reversal of the direction of policy over the last year. They have been raising interest rates. Now they would have to start cutting them. So that’s a fairly big move to make. And if they are facing recession, it would be unfortunate if that decision is postponed.

RCA: So, there are genuine domestic economic reasons for being concerned about this absence of a governor. It isn’t just a symbolic thing, as I’ve suggested in the past.

EL: Absolutely. And the issue here is, first of all, financial markets are increasingly linked around the world. So you have that affecting Japan. Stock prices going down, for example. Companies in the financial sector declaring that they have losses. But you also have a real economy effect as the U.S. economy slows down, so will Japan. Because exports have been the driving force of the Japanese economy since their economic recovery began about five years ago.

RCA: Hang on! I’m under a mistaken …. I thought that Japan had “uncoupled” from the American economy.

EL: Well, that’s what they were saying. That was the optimistic line that the government. Including, by the way, the Bank of Japan, was pushing until pretty recently. The notion was that because China is now a bigger trading partner for Japan than the U.S., that a slowdown in the U.S. economy wouldn’t matter very much for Japan. The reality, it turns out, is that at least a fair portion of Japan’s exports to China are components that go into Chinese exports to the United States. So, a slowdown in the U.S. affects those exports from China. Which in turn affects the exports from Japan. And, with exports being the driving force of the economy recently, a slowdown in exports is going to have a negative impact on the economy.

RCA: That’s useful, and not at all what I expected to hear. I’m sure the audience will appreciate that too. Is there anything else that you can think of just at the moment that we ought to consider about this issue on the economic side, rather than on the political side?

EL: I guess the final comment I would have is more on the political side. My impression has been that in most countries the post of governor or president, or whatever you want to call it, of the central bank, is considered to be at least partially above politics. That, say, compared to picking supreme court justices, there’s more of a willingness to say “Who’s the best person around?” That the party in power can, at least, get along with. And to avoid the kind of debilitating political maneuvering that goes on with other kinds of appointments in government. And so it’s rather extraordinary to see Japan taking a position that is so important and playing big political games. At the present time.

There was no particular problem with Mr. Muto. I think he was relatively respected. He’s known in international circles. Though not really well. So you could blame, say the DPJ for opposing him. But one also could blame the LDP for picking as the next name somebody that nobody had even thought of as a potential candidate for this post. Mr. Tanami is not well known in international circles. I’ve had comments from people I know in the investment community who think that he’s just not a good choice. That’s really puzzling to see this kind of thing going on for a post that’s this important.

RCA: One might suspect that a person with almost the same background being selected the second time, that it was pure political maneuvering that made the choice.

EL: That would appear to be the case. And just to reinforce, maybe, with another economic point that your readers, your listeners, might be interested in. In think one of the important things that has happened in the field of economics over the last forty years is that the opinion about the relative importance of fiscal policy and monetary policy has shifted a lot.

You will be pleased to know, as a conservative, that the University of Chicago basically won the debate. Milton Friedman and his acolytes …  We’ve all come to understand, with further research over the last forty years, that monetary policy really matters in economies. It is critical. And can be fine-tuned a lot better than fiscal policy. Where you have to wait for legislatures to actually vote on budgets and tax cuts, and things like that. So often the impact comes after the recession is already over. But monetary policy matters a great deal. And so again, it’s troubling to see a vacancy in the governorship. And political games continuing about who to put into that post. It’s strange to see this happening.

RCA: Thank you again so much for your insights into this area. I really appreciate it. You’re one of the very few economists who both understand economic and politics. So we’re in your debt once again.

EL: Glad to help you out.

Well, there you have it. Another view of this political problem. From primarily the economic perspective. But with full recognition and understanding of the politics of these issues as well. Ed’s unusual in that respect among U.S. economists. We’re bound to hear more about this in the weeks to come. So I’ll try to keep you posted.

Japan’s Response to China’s Tibet Problem

I’d hoped to have time to consider Japan’s response to China’s Tibet problem in some detail this week. But we’re nearly out of time. So more detailed consideration will have to wait until next week. But briefly, eruption of the Tibet situation has been about as welcome in Tokyo as it has in Beijing. Well, in official Tokyo, that is. Japan’s official government spokesmen have been quite cautious in their reaction to recent events in Tibet. That’s significant, I think.

Briefly, peaceful, and long-anticipated, protests began in Lhasa, the capital of Tibet, Monday before last, March 10th. That was the 49th anniversary of violent Tibetan demonstration against China’s domination of Tibet. Violent protests, and violent Chinese government reaction, that ultimately forced the Dalai Lama into exile in India.

The March 10th demonstrations led by monks from a monastery near Lhasa remained relatively peaceful. Although reports of arrests and police beatings have since emerged. The protests continued throughout the week, growing increasingly violent, with police firing teargas canisters into the crowd and making many more arrests.

By Friday, the 14th, the demonstrating Tibetan monks and nuns were joined by members of the general population. Who, it was reported, attacked Han-Chinese-owned shops and vehicles. Raising considerable the level of violence.

All of this would have gone unnoticed by the world community. Including Tokyo. Just another regional protest in China against the central regime. One of thousands. Had not video media coverage of the disturbances filtered out into the international press. But filter out it did. And by the weekend the whole world knew Tibetans were protesting against China’s suppression of religious freedom in their country. Soooo, how to respond?

On Saturday, the 15th, government official spokesmen at both the Kantei and the Foreign Ministry urged both the Tibetans and Beijing to exercise “restraint.” To avoid violence and try to settle their differences peacefully. The Foreign Ministry also urged Beijing to protect the lives of any Japanese citizens living or traveling in Tibet. Quite neutral, unexceptional comments. And this official posture has continued.

Behind all of this, the Tibetan crisis could hardly come at a worse time for Tokyo’s international planners. Tokyo has been making every possible effort to assure the success of Chinese President Hu Jintao’s visit to Japan in early May. A genuinely important event. That if it goes smoothly will give Japan-China cooperation a considerable boost. Let alone, the importance of this historic visit for the fate of the Fukuda Cabinet. Whose public approval ratings continue to drop like a stone.

Proper handling of the Tibet issue could well become more difficult for Kasumigaseki than the tainted gyoza issue we’ve discussed in the past few weeks. Let alone the East China Sea gas exploitation and border demarcation issue. Leaving Prime Minister Fukuda and the ruling coalition vulnerable to charges from their political opposition that they’re “pandering” once again to Beijing. With the implication they’re doing so for “political” rather than “diplomatic” reasons. A delicate time indeed.

Concluding Comments

We’re out of time now. We’ll have to consider Tokyo’s response to this issue in more detail next week. I’ll continue to try to persuade a commentator more familiar with the Chinese side to join us. But, prospects for that aren’t bright. Given the sensitivity of the issue, I guess. So,

Goodbye all. Until next week.