Q+A-What Japan Democrats' victory may mean for BOJ

Wed Sep 16, 2009 5:45am EDT

By Tetsushi Kajimoto

Sept 16 (Reuters) - The Bank of Japan will likely face political pressure from a new government leaning on monetary policy to support an economic recovery.

Prime Minister Yukio Hatoyama's Democratic Party is thought to respect central bank independence more than the former ruling coalition led by the Liberal Democratic Party.

But analysts say the Democrats could prove pragmatic and ask the BOJ to support the economy by keeping interest rates low, even though they may not pressure the central bank as explicitly as some LDP lawmakers have done in the past.

One Democratic Party official has already raised eyebrows within the BOJ by suggesting the party might ask for central bank help in funding future spending to support the economy.

The following are some questions and answers on what a DPJ-led government could mean for the BOJ.

WHAT THE DPJ HAS SAID ON BOJ'S EASY MONEY POLICY

Katsuya Okada, Japan's new foreign minister and previously the party's No.2 executive, said in July the government should not interfere in monetary policy and would respect BOJ decisions. [ID:n183248]

Some party officials, including Kohei Otsuka, a former BOJ official and later a vice finance spokesman of the party, have been critical of the BOJ's easy money policy, saying low rates deprived consumers of interest income.

But in the wake of the global financial crisis he too has said the government should leave monetary policy alone. [ID:nT20701]

Even though the Democrats have said they want to shift Japan's export-reliant economy towards one more focused on personal consumption, analysts say Japan will continue to rely on exports for growth and therefore may need to keep rates low.

Investors expect the BOJ to keep interest rates on hold at 0.1 percent at least until 2011. [JPINTR=ECI]

HAS POLITICAL PRESSURE INFLUENCED THE BOJ IN THE PAST?

Senior government officials have often opposed rate hikes, saying mistimed moves could hurt economic growth.

The BOJ law of 1998 guarantees its independence, including preventing a government from removing the governor. But the bank has been seen as vulnerable to political pressure.

That pressure may count for more in Japan than in the United States or the euro zone, as the government can wield influence over monetary policy through Cabinet Office and Ministry of Finance representatives who attend BOJ meetings.

Government representatives cannot vote on policy but they can voice opinions and request delays in votes, such as in August 2000 when the BOJ moved to end zero rates.

The BOJ board turned down that request and raised rates, only to revert to an even more accommodative policy of quantitative easing in March 2001 after the economy worsened.

WOULD THE DEMOCRATS WIELD MORE INFLUENCE ON MONETARY POLICY?

Democrats, including Okada, have repeatedly said monetary policy should be left in the hands of the central bank.

But Otsuka said last month there might be room for the BOJ to help the government in any crisis, such as by having the central bank and the government reach an "accord" on how to steer the economy, Otsuka said. [ID:nT51816]

Markets took his remarks as a sign that the Democrats might put pressure on the BOJ to keep rates low or purchase more government debt to help fund stimulus spending.

His comments might not represent the party's official stance but he could gain support if economic conditions were to worsen.

Some within the BOJ were alarmed by his comments, although what seemed to worry them more was a lack of clarity on how a Democrat-led government would communicate with the central bank, and who would be in charge.

For more on DPJ policies and bond markets see [ID:nT328137]

Last year the party, which controls the upper house together with smaller allies, rejected the then-government's nominees for key BOJ posts, including that of governor, on the grounds that some of the candidates were former Ministry of Finance bureaucrats, which would undermine the bank's independence.

Most analysts saw the move as politically driven, aimed at putting pressure on the LDP, but some say it also suggests the party might not take a hands-off approach on BOJ decisions.

Some analysts say now that the Democrats have taken power they may try to influence BOJ policy by nominating candidates more supportive of the party's economic policies.

The BOJ's nine-member board has one vacancy, and the term of one board member expires in December. Board appointments must be approved by both houses of parliament. (Editing by Michael Watson) Reuters Messaging: tetsushi.kajimoto.reuters.com@reuters.net))