Q+A-What would Japan opposition victory mean for BOJ?

Tue Aug 25, 2009 1:15am EDT

By Tetsushi Kajimoto

Aug 25 (Reuters) - The Bank of Japan will likely face political pressure regardless of whether the ruling coalition or the main opposition wins the upcoming election, with both parties seen leaning on monetary policy to support an economic recovery.

The Democratic Party, which polls show has its best ever shot at winning the Aug. 30 election, is thought to respect central bank independence more than the ruling Liberal Democratic Party.

But analysts say the opposition could turn more pragmatic and ask the BOJ to support the economy by keeping interest rates low, even though it might not pressure the bank as explicitly as some LDP lawmakers have done in the past.

One party official has already raised eyebrows within the BOJ by suggesting the party, if it takes power, 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 HAS THE DPJ SAID ON BOJ'S EASY MONEY POLICY?

Katsuya Okada, the opposition's No. 2 executive, said last month the party believes the government should not interfere in monetary policy and would respect BOJ decisions. [ID:nT183248]

In the past some party officials, including Kohei Otsuka, a former BOJ official who is now 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 that was before the global financial crisis. Many analysts doubt if the party would stick to the same argument now.

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.

"I think the Democrats will take a more pragmatic approach to macroeconomics if they come to power," said Hirokata Kusaba, a senior economist at Mizuho Research Institute.

"Being the opposition, their criticism of monetary policy in the past stemmed much from political motives."

Investors expect the BOJ to keep interest rates on hold at 0.1 percent at least until 2011.

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 such as by stipulating that the government cannot remove 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 some influence over monetary policy through the 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 tried 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 this month that there might be some 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 is 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:nT289544]

Last year the party, which controls the upper house together with other opposition parties, rejected government nominees for key BOJ posts, including that of governor, on the grounds that some of the candidates were former finance ministry 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 add that if the Democrats take 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 now has one vacancy and the term of another board member expires in December. Board appointments must be approved by both houses of parliament.