Business

Mon Jun 02 23:57:00 PDT 2008

(Adds comments, background)

By Yoshiyasu Shida

TOKYO, June 3 (Reuters) – Japan’s economic slowdown is unavoidable and the central bank is right to focus on risks to monetary policy, Kazuhito Ikeo, a government nominee to join the Bank of Japan’s rate-setting board, said on Tuesday.

Ikeo, a hawkish economics professor and an expert on banking, needs approval from both of Japan’s houses of parliament to join the BOJ, including the opposition-controlled upper house that has tossed out five past nominees as it challenges the government at every turn.

Ikeo’s nomination almost died last week when the main opposition Democratic Party protested his name being leaked to media before it went to parliament, but accepted a government apology for the leak and has shown no strong opposition to Ikeo since then.

"Japan’s economic slowdown has been unavoidable, particularly as it is led by overseas factors," Ikeo told a parliamentary panel considering his nomination ahead of a parliamentary vote later this month.

The turmoil over the BOJ appointment has cast more doubt on the leadership of Prime Minister Yasuo Fukuda, who is under pressure to step down as his support rates plunge.

A split parliament has forced the government to spend months battling to get BOJ nominees approved in the midst of the credit crisis. The opposition so far rejected five candidates for various senior positions at the central bank.

But for investors, the saga over BOJ nominees is largely a sideshow, and the markets reacted little to Ikeo’s first public appearance since he was nominated last week.

"The Bank of Japan’s current thinking on monetary policy, which is to implement policy flexibly by examining the outlook for the economy and prices, as well as upside and downside risks, seems quite appropriate," Ikeo said.

The BOJ dropped it bias towards monetary tightening in April, saying it was inappropriate to predetermine policy direction given high uncertainty.

Market players expect the BOJ to keep the overnight call rate target at 0.5 percent for a while before eventually raising it.

The BOJ’s nine-member board currently currently has two vacancies, including one for a deputy governor.

Masaaki Kanno, chief economist at JPMorgan Securities Japan, noted that some saw Ikeo as a policy hawk because of his view that low interest rates would distort allocation of resources and that it was desirable to have an environment in which interest rates would function well.

"But I think Ikeo is flexible enough to take a pragmatic approach to monetary policy once he joins the BOJ board," Kanno added.

Ikeo, who has served on several government panels and is known for opposing inflation targeting, said that the basis for Japan’s economic growth had strengthened substantially compared with several years ago.

He added that it was important to look at such structural changes and the health of the financial system to assess the economy, not just short-term trends in demand.

Kanno said Ikeo would contribute greatly to debates at board meetings, with his expertise on financial systems."

"I really hope that the Democrats won’t vote him down. If they do, there will be no one left to join the BOJ board."

No nomination has yet been made for the BOJ board’s other vacancy, for a deputy governor, and senior government officials suggested they were unlikely to pick one by June 15, when the current parliament session is due to end.

The central bank’s policy board has continued holding rate reviews with seven members.

(Editing by Rodney Joyce)

Provided by Reuters

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