BANK OF JAPAN: SHIRAKAWA AT LAST

C O N F I D E N T I A L SECTION 01 OF 02 TOKYO 000977

SIPDIS

SIPDIS

TREASURY FOR DOHNER, POGGI; STATE FOR EEB/OMA AND EAP/J;
NSC FOR TONG;

E.O. 12958: DECL: 04/19/2018
TAGS: EFIN ECON PGOV JA
SUBJECT: BANK OF JAPAN: SHIRAKAWA AT LAST

REF: A. TOKYO 801

B. TOKYO 761

Classified By: CDA M. Meserve for reasons 1.4 b/d

Summary
--------------

1. (C) Japan's ruling coalition and leading opposition party
finally agreed on a candidate to fill the post of central
bank chief April 9, endorsing Deputy Governor Masaaki
Shirakawa. Shirakawa was named one of the two deputy
governors March 19, and served as Acting Governor during the
three week governorship vacuum period, as the previous
governor's term ended without a replacement, due to political
fighting in the Diet. Monetary policy should remain
consistent with the approach taken under former Governor
Fukui. The impasse over the Bank of Japan appointments has
placed serious stresses on the Fukuda administration and on
the two major political parties. It also showcased Japan's
current Diet dynamics in a most unflattering light for the
international community. End Summary.

Shirakawa In, Watanabe and Any Other MOF Figures Out
-------------- --------------

2. (U) Having endorsed Shirakawa as Deputy Governor in
March, the main opposition Democratic Party of Japan (DPJ)
went along April 9 with his nomination to the top job.
However, the ruling coalition's attempt to place former MOF
Vice Minister Hiroshi Watanabe into Shirakawa's vacant Deputy
Governor slot was blocked by the DPJ. Recently, DPJ
President Ozawa publicly announced he was fundamentally
opposed to former MOF bureaucrats assuming positions at the
BOJ. However, Prime Minister Yasuo Fukuda evidently wished
to continue the tradition of including top figures in the
bank with links to MOF, academia, and the private sector.
Given the DPJ's control of the Upper House, Watanabe's
opportunity to take Shirakawa's vacated position fell short;
the Deputy Governor slot will remain vacant for the time
being.

Fukuda, Ozawa Both Damaged, but DPJ Holds Firm
-------------- -

3. (C) The April 9 plenary votes went largely along party
lines, with only a few DPJ defections, belying major
disagreements within the DPJ over Watanabe's nomination.
Earlier that morning, most major dailies had described the
main opposition party as in "serious disarray" over the
issue, noting that party leaders were resorting to
heavy-handed tactics to enforce party discipline. A few
reports suggested Ozawa was losing his grip on the party, and
labeled the Watanabe votes a referendum on his leadership.
Shortly after the votes, the media proclaimed Ozawa firmly in
control. Some reports suggested DPJ leaders feared a reprise
of Ozawa's November 2007 resignation over a proposed "grand
coalition" with Fukuda's ruling Liberal Democratic Party
(LDP). An Embassy media contact said that while a majority
of DPJ members may have supported Watanabe's nomination, they
decided in the end to put the priority on party unity,
recognizing that there is no suitable alternative to Ozawa at
this time. Prime Minister Fukuda, for his part, has drawn
sharp and repeated criticism, including from some in his own
party, for insisting on successive nominees with MOF
backgrounds. His support in public opinion polls has dropped
sharply over the past several weeks.

Policy Normalization, If Normal Holds
--------------

4. (U) Although Shirakawa evinced a preference for policy
normalization in a September 3, 2007 interview with the
Nikkei, in which he stated, "(I)f the view spreads that the
call rate will remain indefinitely low in contrast to the
economic realities...I would not rule out the possibility of
too much fluctuation in the economy and prices," during his
April 8 Diet confirmation hearing, he asserted, "(The

TOKYO 00000977 002 OF 002


important thing is) not to hold prejudgments but to carefully
examine the probability of forecasts and the risk factors on
both the upside and downside, resulting in flexible
implementation of policy as needed and as appropriate,"
suggesting that he is not ruling out future rate cuts,
depending on conditions. Market analysts reading these tea
leaves suggest that he has taken a less hawkish stance in
view of recent market developments.

Market Response
--------------

5. (U) In his first Policy Board meeting as Governor,
Shirakawa left the key overnight rate at 0.5 percent, as the
BOJ cautioned, "Japan,s economic growth is slowing, mainly
due to the effects of high energy and materials prices." The
Nikkei average closed down 1.1 percent, and Japanese
government five, 10, 20, and 30 year bond yields all closed
up slightly on reduced expectations of a BOJ rate cut.
SCHIEFFER