STALEMATE ON BANK OF JAPAN GOVERNOR?

C O N F I D E N T I A L SECTION 01 OF 02 TOKYO 000667 SIPDIS SIPDIS TREASURY FOR DOHNER, SOBEL, POGGI, CARNES USTR FOR BEEMAN USDOC FOR NMELCHER NSC FOR TONG E.O. 12958: DECL: 03/12/2018 TAGS: EFIN JA MARR PGOV SUBJECT: STALEMATE ON BANK OF JAPAN GOVERNOR? REF: TOKYO 548 Classified By: Deputy Chief of Mission Joe Donovan for reasons 1.4 (b) and (d) ¶1. (C) Summary. The opposition Democratic Party of Japan (DPJ) voted down the GOJ nominations of Toshiro Muto for Governor of the Bank of Japan, and Takatoshi Ito as Deputy Governor in the Upper House of the Diet on March 12, while approving the nomination of Masaaki Shirakawa for the other Deputy Governor slot. The Diet's Lower House will vote in favor of all three candidates on March 13, but since the approval of both houses is required, a stalemate will result. Chief Cabinet Secretary Machimura told the Ambassador that the Prime Minister had not yet decided what to do. Former Finance Minister Omi concurred and said he foresees new Deputy Governor Shirakawa acting as the "international face" of the Bank of Japan for an extended period of time with the LDP reintroducing the Muto and Ito nominations when the Diet reconvenes in the fall. End Summary. ¶2. (SBU) ON March 7, the government nominated Deputy Governor Muto of the Bank of Japan to succeed Governor Fukui when he steps down on March 19. Masaaki Shirakawa, former Bank of Japan Executive Director, and Takatoshi Ito, professor of Economics at the University of Tokyo and member of the Council on Economic and Fiscal Policy, were nominated by the government as deputy governors. Diet hearings on the government,s nominees opened on March 11, as the three nominees appeared before of the Rules and Administration committees of both Houses. ¶3. (SBU) On March 12, the DPJ-dominated Upper House voted down the nominations of Muto and Ito, but approved Shirakawa for the Deputy Governor position. The ruling parties are expected to hold the Lower House vote on March 13 and approve the three nominees. Since approval is required by both houses, and there is no Lower House override in this case, Shirakawa will be approved. However, there will be a stalemate on the other two positions. Following the Upper House vote, Finance Minister Nukaga and Chief Cabinet Secretary Machimura countered that the government will simply SIPDIS re-nominate the two nominees rejected by the opposition-controlled Upper House. ¶4. (C) Chief Cabinet Secretary Machimura told the Ambassador that Prime Minister Fukuda had not yet decided what to do in the face of the DPJ's rejection of Muto and Ito. In a later meeting, former Finance Minister and Lower House LDP member Koji Omi seconded Machimura's statement that the Prime Minister hadn't decided on next steps. However, he added that Shirakawa might serve as acting BOJ Governor until the LDP could re-nominate Muto. Shirakawa could serve as the BOJ's "public face" until that time. Omi opined the LDP would wait until the next session of the Diet starts, perhaps in August of September, to re-nominate Muto. The LDP would take into account public reaction to the the DPJ's actions when making a decision on re-nomination. The DPJ would not nominate a candidate itself because it did not want to "take responsibility," Omi said. The former Finance Minister felt Muto would do a good job leading the Central Bank. ¶5. (C) A Democratic Party of Japan (DPJ) headquarters staffer speculated to Poloff that the vote in the Upper House may reflect a willingness to compromise on the part of DPJ leader Ichiro Ozawa. Ozawa has been on shaky ground with certain elements of his own party since his failed efforts to TOKYO 00000667 002 OF 002 form a grand coalition with Prime Minister Fukuda in October and November 2007, and ruffled some of the same feathers when he intimated back in February that the DPJ might support the Muto nomination. Faced with the additional outcry over the ruling coalition's railroading of the budget and budget-related bills through the Lower House on February 29, she noted, he may have felt no other choice but to bow to these anti-Ozawa forces within the DPJ -- the same forces that just happened to oppose the Muto nomination on substantive grounds. By voting in favor of Shirakawa, despite the ruling coalition's stance that the three nominations should stand as a set, Ozawa may be trying to have it both ways. ¶6. (C) Comment. The appointment of Masaaki Shirakawa as Deputy Governor, who would then assume the role of Acting BOJ Governor, may be a face-saving way out of the standoff that the LDP and DPJ have created for themselves. Market analysts and the press have chided the politicians for potentially leaving the important position of BOJ Governor empty during a period of global financial market turmoil (the stock market was up 1.6 percent on March 12, though press reports attributed the rise to the coordinated actions of the Federal Reserve and other central banks to provide liquidity to financial markets). It is not yet clear how the markets would react to the scenario of Acting Governor Shirakawa for an extended period of time, but if an alternate solution is not reached in the next few days, that is the scenario that could result, as the parties turn away from this impasse to take on the even thornier issue of the budget-related tax bills. End Comment. SCHIEFFER