Hopes pinned on new bank governor

When Toshihiko Fukui assumed the role of governor of the Bank of Japan last week many hoped he would be taking positive measures to tackle Japan’s problem of chronic deflation. Although he has made a cautious start it would be premature to make a definitive judgement on his likelihood of success.

Jonas Lindmark 26 March, 2003 | 6:56PM
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Hopes were raised when the new governor immediately called an emergency meeting of the Bank of Japan’s policy board. The Tokyo market went up before the meeting even though most other large stockmarkets fell because of the news from Iraq over the weekend. It seemed that Mr Fukui was about to jumpstart the Japanese economy.

The result of the emergency meeting was therefore disappointing. The Bank of Japan voted seven to two for an expansion of the six-month-old scheme to buy shares from commercial banks. The limit was raised from ¥2 trillion (£10.6 billion) to ¥3 trillion – an increase equivalent to only a third of a percent of Tokyo’s total market capitalisation.

Investors had been hoping for more. Before the emergency meeting economists were predicting that the Bank of Japan would start to buy exchange traded funds or foreign bonds. The last alternative would probably push down the yen exchange rate, promoting both inflation and exports.

Strong statements

After only a week in office it is still too early to give up hope that the new governor will bring radical reforms. Mr Fukui has long experience working at the Bank of Japan, before his resignation in 1998, and he made strong statements in his parliamentary testimony last week.

The best hope to bring positive change to the Japanese economy is still the new leadership at the Bank of Japan. It could yet break Japan’s economic deadlock by creating controlled inflation. But considering that Japan’s economic problems have steadily worsened for over a decade it is reasonable to give Mr Fukui more than a week to push through the necessary reforms.

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About Author

Jonas Lindmark

Jonas Lindmark  has been editor and head of fund analysis at Morningstar Sweden since August 2000. Before that he was personal finance editor and designed fund ratings during 9 years at the weekly business magazine Affärsvärlden.

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