BANK OF JAPAN -- ACTING GOVERNOR ONLY

C O N F I D E N T I A L SECTION 01 OF 02 TOKYO 000761 SIPDIS SIPDIS E.O. 12958: DECL: 03/19/2018 TAGS: EFIN ECON PGOV JA SUBJECT: BANK OF JAPAN -- ACTING GOVERNOR ONLY Classified By: Ambassador J. Thomas Schieffer for reasons 1.4 b/d Summary -------------- ¶1. (C) Despite the appointment of Masaaki Shirakawa as acting governor of the Bank of Japan (BOJ),local and international press wasted no time in lambasting Japanese politicians for failing to appoint a new governor by March 19, the end of the previous governor's term. The vacancy is the first for the BOJ since 1923. The BOJ has informed the Fed and other central banks of Shirakawa's appointment as acting governor, where he has full authority over bank operations. Media criticism has focused on Japan's compromised credibility and while both parties have been tarred by the episode, PM Fukuda has suffered the most. Due to a local holiday, Japanese markets were closed March 20. End Summary. Governorship Vacant; Acting Governor Appointed -------------- - ¶2. (U) March 20 marks the first day since 1923 the governorship of the Bank of Japan stands vacant. Former Governor Toshihiko Fukui's five-year term ended March 19, the same day the opposition-controlled Upper House rejected the candidacy of Japan Bank for International Cooperation Governor Koji Tanami, the ruling party's second nominee for the job. ¶3. (U) Deputy Governor Masaaki Shirakawa, the only one of Prime Minister Fukuda's original nominees for the BOJ leadership to win approval by both houses, has subsequently become acting governor of the central bank of the world's second largest economy. Shirakawa is a 58-year-old university professor and spent 34 years at the BOJ, including as its executive director. The BOJ informed the Federal Reserve and other central banks that Shirakawa is now acting governor and has full authority over bank operations. ¶4. (U) Kiyohiko Nishimura, 54, is the other new deputy governor. Nishimura was put forward by PM Fukuda after the Upper House voted March 12 to block his first nominee for governor, Toshiro Muto, and his nominee for the second of the two deputy positions. Nishimura has been on the BOJ's policy board since 2005. Both he and Shirakawa were educated in the United States. Compromised Japanese Credibility -------------- ¶5. (SBU) The vacancy in the BOJ's top spot is seen by many as an embarrassment. Market and media commentators complained about the lack of a governor at a time of high oil prices, a strong yen, and international market turmoil. Leaders at the Japan Business Federation (Keidanren),the Japan Chamber of Commerce, the Japan Association of Corporate Executives, and the Japan Automobile Manufacturers Association all publicly criticized the failure to appoint a governor. Some stated it had compromised Japan's credibility. Others expressed fear Japan might be unable to act appropriately if concerted international financial actions were necessary. ¶6. (SBU) There is public speculation that the Diet's jockeying over road-related taxes and surcharges, along with other special revenue measures, could delay confirmation of a new governor for weeks if not longer. The Japanese press is running stories that acting governors may not be allowed to participate in meetings of G-7 central bankers, such as those scheduled on the margins of the April IMF/World Bank meetings in Washington. TOKYO 00000761 002 OF 002 Political Fallout -------------- ¶7. (C) The political squabble over the BOJ appointments has tarred the ruling Liberal Democratic Party (LDP) and the main opposition Democratic Party of Japan (DPJ) more or less equally, but PM Fukuda has emerged the real loser, based on media reporting. The three big issues facing Fukuda coming into the current Diet session were the BOJ appointments, the budget, and two key budget-related bills. Fukuda is assured passage of the budget before the end of the fiscal year on March 31, but lost the BOJ fight and prospects for the related legislation are uncertain at best. ¶8. (C) Nearly six months into his term, Fukuda has been repeatedly criticized for his failure to demonstrate leadership in a divided and deadlocked Diet. Editorials over the past several days have castigated him further for what has been characterized as stubborn insistence on putting forward successive BOJ candidates with the same basic credentials, without regard to opposition demands. He is also criticized for failing to galvanize the public or open alternative channels for discussion with the DPJ. Polls conducted in recent days show a continued steady erosion in cabinet support, down to the low 30s, with nonsupport rates over 50 percent. ¶9. (C) The DPJ has not escaped unscathed, with editorials focused on their obstructionist tactics and unwillingness to compromise. DPJ leaders had intimated back in mid-February that they would approve the original slate of candidates, although it is now apparent that a significant number of DPJ lawmakers never agreed with that stance. Either way, internal debates within the DPJ became irrelevant after the ruling coalition forced a Lower House vote on the budget and key budget-related bills February 29 -- in perceived contravention of a deal brokered by the Upper and Lower House leaders in late-January -- and handed the DPJ its latest cause. ¶10. (C) DPJ leader Ichiro Ozawa is now criticized in the press as erratic and undependable. Former Chief Cabinet Secretary Kaoru Yosano told Assistant to the President and SIPDIS Deputy National Security Advisor for International Economic Affairs Daniel Price March 19 that Ozawa had handled the BOJ nominations in a "childish" manner and would eventually pay a political price. While the DPJ can defend its actions as consistent with respect to its demands for a central banker with sufficient distance from the Ministry of Finance, it will have a difficult time explaining why it never really put forward its own slate of candidates, or refuting media criticism that it sacrificed Japan's national interest for politics. DPJ support in recent polls has not fallen significantly, but Embassy contacts say the party lost an opportunity to gain additional support as a responsible party capable of governing. Holiday Closed Markets March 20 -------------- ¶11. (C) Due to a local holiday, Japanese market were closed March 20. A NikkoCiti analysis anticipates the vacancy in the governorship will have little impact on financial markets, but the local market will render its judgment March ¶21. SCHIEFFER