TOKYO: Toshiro Muto, nominated Friday as the next governor of the Bank of Japan, is a political artist who can blend economics with insider expertise to get things done in the countrys powerful government bureaucracy.
But to replace the central banks current governor, Toshihiko Fukui, who retires on March 19, Muto must find a way to paint that picture convincingly for opposition lawmakers who hold veto power over the job and who fear his close government ties.
Many investors fear that the government and opposition will not come to an agreement, leaving the helm of the bank empty at a crucial period for the worlds second-largest economy after the United States.
“A vacuum in the BOJ governors position would undermine confidence in Japanese politics and could further discourage foreigners from investing in Japanese markets, likely hitting the stock market hardest,” said Hideki Hayashi, global strategist at Shinko Securities.
Since he arrived at the central bank in 2003, Muto has worked closely with Fukui. Many see him as having been groomed for the top job. Some say Muto is less hawkish in fighting inflation than his boss and he might be more likely to cut interest rates in the face of weaker growth as the global fallout grows from the U.S. subprime mortgage crisis.
“Muto may seek to raise rates in the long term, but his policy handling will be pragmatic in the near term,” said Naomi Hasegawa, senior strategist at Mitsubishi UFJ Securities.
Many Bank of Japan officials think Mutos experience as a budget negotiator is a huge boon, as central bank staff are often long on economic theory but short on skills in political maneuvering.
Muto, 64, spent most of his career at the Finance Ministry, rising to become vice finance minister, the ministrys top job for a bureaucrat.
A lack of English language skills may be a drawback for his ambition for the top central bank job, however, at a time of global financial stress when coordination between major central banks is increasing.
Muto is known to people who have worked with him as impartial and reliable, but away from the office he paints flamboyant, surrealist oil paintings. An admirer of the painter Marc Chagall, he exhibited at a gallery near the central bank in 2004.
The contrast seems striking, but Muto says he deliberates carefully before putting brush to canvas and that his painting is part of a planned life, preparing him for retirement.
Muto joined the central bank during a financial crisis as Japan battled to repair moribund banks and end deflation. After the banking mess was fixed and the economy started growing steadily, he oversaw the banks exit from its unorthodox policy of flooding banks with cash and subsequent rate increases.
In 2006, when Fukui was caught in a scandal over his personal investments, it was Mutos efforts to deter angry politicians that helped his boss stay in his post, central bank watchers say.
Muto has always sided with Fukui in monetary policy decisions, and his public remarks have rarely gone beyond a repetition of the banks official statements, carefully calculated not to shock markets.
“The economy will be slowing down in the near future but it will likely expand moderately in the long run,” he said last month.
If he becomes governor, Muto will inherit an economy that appears to be running out of steam after more than five years of expansion, strained by persistently weak domestic demand, a slump in housing investment and the threat of a U.S. recession.
Financial markets are pricing in around a 60 percent chance of a rate cut by the end of this year, a reversal from half a year ago, when investors thought rates would be doubled to 1 percent before Fukui retired. That may be partly because Muto is seen as less hawkish than Fukui, a career central banker who has pushed to raise rates out of fears that loose money will lead the economy to overheat.
A Reuters poll in January found 32 of 53 Tokyo investors wanted Muto to take the helm.
However, it is politics rather than markets that could sink his candidacy. The new Bank of Japan chief needs to be approved by both chambers of the Parliament, and opposition parties hold a majority in the upper house.
Some senior opposition lawmakers have said that having a former Finance Ministry heavyweight running the bank could risk its independence at a time when the government might put pressure on it to keep rates low to ease the pain of financing Japans huge public debt.
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