Row Ends Over Japan's Central Bank

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Toshifumi Kitamura / POOL / EPA

Government-named candidate for the Bank of Japan governor Masaaki Shirakawa (L) delivers a speech in the Diet in Tokyo on April 8

The third time's clearly the charm. In finally selecting the government's third nominee to run the central bank, Japan has acted in the nick of time. Amid a global economic crisis, the sigh of relief is almost audible in Tokyo following the decision of the world's second largest economy not to continue to lose face in the week leading up to Friday's Group of Seven finance ministers' meeting in Washington.

The Democratic Party of Japan (DPJ), the opposition party that controls the Upper House, finally approved Prime Minister Yasuo Fukuda's third choice — Masaaki Shirakawa — for governor of the Bank of Japan. Shirakawa, 58, became the deputy bank governor in mid-March and then took over as interim governor after former central bank governor Toshihiko Fukui retired from his five-year term on March 19. The DPJ refused the two previous nominees — Toshiro Muto and Koji Tanami — over concerns that their ties to the Finance Ministry might compromise the bank's independence. The lack of a permanent leader in the BOJ's top desk, however, has led observers within and outside Japan to question the nation's credibility as a global financial player — and it is but one example of a parliament mired in a state of political paralysis.

For the first time in Japan's parliament, two parties share majority rule between the Upper and Lower houses. The Liberal Democratic Party (LDP), after holding the reins of the Diet for more than five decades, lost the Upper House to the DPJ during last summer's elections. As a result, the last eight months have been a political tug-of-war that has resulted in many disputes. Playing a central role is Fukuda, who has watched his approval ratings plummet in the past few weeks, with some polls showing as low as 24%. (By contrast, former Prime Minister Shinzo Abe's approval rating hovered around 30% when he stepped down last September.)

"The political parties and government officials are not familiar with this new situation, so it takes time to settle things," says Jun Iio, a professor of government at the National Graduate Institute for Policy Studies. But how long does Japan have? While some might chalk up the gridlock to the nascent stages of an emerging two-party democracy, others blame both the LDP and the DPJ for a lack of concern over issues that have both domestic and global ramifications.

Parliament's track record so far doesn't seem promising. But if pain is any indication of progress then perhaps the LDP and the DPJ are onto something. Aside from deciding on the next BOJ governor, the issue of Japan's gasoline tax has come up and gone — and will likely come up again if the LDP and Fukuda's government have their way. Since 1974, those who purchase gasoline have paid a 25-yen ($0.25) per liter tax. But the law that enforced the surcharge ended on March 31. The Fukuda government submitted a revision to the tax reform law on Feb. 29 in order to extend the tax another 10 years and the DPJ refused to sign the bill. On April 1, long lines at the pumps showed Japan's desire for cheaper gas. But come May, when 60 days will have passed since the proposal of the tax revisions, the Lower House can approve the bill with a two-thirds majority. The DPJ says that if the LDP does this, then they could slap a formal reprimand against Fukuda. And last November, when the bill to renew Japan's anti-terrorism refueling mission in the Indian Ocean became a point of contention, the DPJ also suggested a reprimand and opposition party leader Ichiro Ozawa left for a trip to China with his senior advisors in a spectacular display of disapproval. Nevertheless, the bill ended up passing three months past deadline.

Perhaps the activism of the DPJ is slowly working. Fukuda appears to be starting to make concessions: for instance, the DPJ has recently indicated they could look favorably upon the nomination of deputy governor Shirakawa for the top seat. And on the gasoline surcharge, Fukuda announced on March 27 that he would free up the gas tax revenues now dedicated to building roads for general spending from fiscal 2009 to 2010, in an attempt to break the deadlock over the gasoline surcharge issue — although it didn't work. Neither did the proposal of Hiroshi Watanabe, the person Fukuda nominated on Monday for the deputy governor position. Again, the DPJ was expected to veto a former official of the Ministry of Finance. In terms of BOJ nominees, it looks like the parties are tied at 3 — but at least when it comes to this Friday's G7, Japan can put this to one side and play a real part in the meeting.