Mr. Kono’s rejection and the recent board appointments sent a clear message to the central bank that it needed to change, said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute in Tokyo and a former central bank official. “It will certainly have an effect on who will be chosen as governor.”
At the working level, the BOJ is preparing for a leadership change next spring when the terms of Shirakawa and both of his deputies expire. The bank has appointed 50-year-old Shinichi Uchida as head of the Monetary Affairs Department, making him the youngest of the bank’s 15 department heads and surprising many in an organization where posts are almost universally assigned according to seniority.
Miyako Suda, who served on the BOJ board for a decade before leaving in March 2011, had been Shirakawa’s last dependable ally. Suda stood out as the only woman on the policy board during her tenure, and because she was so open with her dissent.
Mr. Suda warned that too much easing might forestall more important economic reforms, such as deregulation and opening up Japanese markets to foreign competition. For Shirakawa, Suda also had been something of a soulmate and sounding board, someone who shared his core set of beliefs, people close to the policy board say.
The pressure for a shakeup at the BOJ has mounted both from the LDP and key members of the ruling Democratic Party. The new generation of BOJ critics mostly started their careers during Japan’s lost decades. They have witnessed how fiscal policy tools such as subsidies, tax breaks and massive public works failed to jolt the economy back to life.
As a matter of tradition the top BOJ job long rotated between career central bankers and finance ministry bureaucrats, though BOJ insiders have dominated the post for the past 15 years. Now lawmakers and finance ministry officials are putting on the pressure to bring in someone from outside to replace Shirakawa.
That favors candidates such as Toshiro Muto, 69, a former finance ministry bureaucrat who served as deputy governor from 2003 to 2008 and Kazumasa Iwata, 66, a former deputy governor who now sits on a government panel discussing ways to boost Japan’s productivity. Both advocate a radical expansion of the BOJ bond-buying program and both play down the threat of inflation or another market bubble.
“The effect of non-traditional policy may not be clear, but neither are the side-effects. The chance of Japan seeing inflation flare up soon is small,” Muto told Reuters.
The BOJ’s post-Shirakawa policies could have global reverberations. If the experiment with radical monetary expansion fails, it would strengthen the opponents of quantitative easing policies that have been in vogue among central banks across the world. Foes warn of its diminishing returns and risks for long-term financial stability. Success in Japan would have the opposite effect, perhaps ushering in a new era of experimental central banking - with an additional side effect of realignment among major currencies, weakening the yen in a lasting manner.
There is no guarantee the BOJ will succeed. The last time price increases were over 2 per cent was in 1992, just after the collapse of the bubble in property and stock prices. That was the end of the boom era when growth had averaged over 4 per cent for nearly two decades.
Bolstered by a pioneering round of quantitative easing Shirakawa helped engineer as a working-level official, Japan’s economy staggered back to average growth of 1.6 per cent between 2002 and 2007.
But the 2008 global financial crisis sent Japan into recession as did the March 2011 earthquake and tsunami. Some members of the BOJ’s policy board have warned the third recession since Shirakawa took the central bank’s helm may have begun in the past quarter.
Some economists say Mr. Shirakawa did well guiding the economy through crisis, though failing to win allies or communicate effectively with markets and lawmakers. Others are not so kind.
When asked to grade Mr. Shirakawa’s nearly five-year tenure, economists at major Tokyo banks surveyed by Reuters at the end of September gave him a grade of 60 per cent. Twelve of 16 said they expected him to leave when his term ends in April. Most rejected the need to change the BOJ law.
Yasutoshi Nishimura, 50, a LDP lawmaker who is expected to have a big say in the choice of the next BOJ chief, underscores the consensus. “The next governor should be someone who does not have the ‘inflation fighter’ DNA,” Mr. Nishimura said.