William Pesek Jnr: Time for Japan to cut its losses with Fukui

Soon after Toshihiko Fukui began running the Bank of Japan in 2003, politicians in Tokyo urged him to become the "Greenspan of Japan, if not Asia".

The idea was that Japan should be Asia's premier monetary power. The US had then-Federal Reserve chairman Alan Greenspan to step up when markets became shaky and restore calm. Europe had Jean-Claude Trichet at the European Central Bank. Asia lacked a trusted, larger-than-life guru, leaving an economic leadership vacuum.

Enter Fukui, who since March 2003 has helped restore credibility to the central bank of Asia's biggest economy. The hope was that Fukui, the only Asian voice at Group of Seven meetings, would help raise the continent's stature with even the wariest investors.

That was until he became embroiled in a scandal last month involving an investment with an indicted fund manager. It has top politicians and a majority of Japanese calling for his resignation. Last week, the head of the ruling Liberal Democratic Party's monetary policy panel said Fukui should resign "immediately".

For any country, the ouster of a central bank governor - especially one as beloved as Fukui - would seem a national crisis. For Japan, that's hardly the case.

To hear Prime Minister Junichiro Koizumi tell it, Fukui's departure would devastate the world's No 2 economy just as it is shaking seven years of deflation. Many investors are coming to his defence, too, arguing that only Fukui is capable of putting Japan on a stable footing in the long run.

There's just one problem with all this: it's not the case.

The truth is that Fukui has yet to be tested enough to back up claims he's irreplaceable.

Few doubt his credentials to run the Bank of Japan. The University of Tokyo graduate spent 40 years at the institution before working his way up to Deputy Governor. After resigning from the central bank in March 1998, Fukui worked in various capacities with Goldman Sachs Group and Fujitsu Research Institute.

Fukui seemed an ideal replacement for Masaru Hayami, who had an unsteady run as Governor between March 1998 and March 2003.

Even so, there's a problem with the only-Fukui-can-save-Japan view that's so pervasive among politicians and investors: it's clouding everyone's judgment.

While he made his 10 million yen ($143,350) investment in Yoshiaki Murakami's fund in 1999, before returning to the Bank of Japan, it created a conflict of interest.

Further compromising his independence is Koizumi's forceful defence of Fukui, putting the central banker in the position of owing the Prime Minister.

The mere perception that the Bank of Japan will raise rates more slowly than expected as a favour to Koizumi means Fukui should go.

The worsening storm of criticism also is distracting the Bank of Japan at a critical juncture in Japan's fight against deflation.

The ante was raised last week when monetary policy panel head Kozo Yamamoto called for Fukui's resignation. More than two-thirds of the people surveyed in a recent Asahi newspaper poll said Fukui should quit.

Japan could handle it. Its 3 per cent growth rate is the fastest in 15 years, while major banks have disposed of the bad loans that undermined the economy throughout the 1990s and the early 2000s. Balance sheets have been repaired enough to boost corporate profits, wages and Japan's global competitiveness.

The Bank of Japan deserves little credit for Japan's return to the plus column. It wasn't the amount of yen the central bank printed that boosted growth, but banks becoming healthy enough to extend credit again. That also goes for the three-plus years Fukui has been in charge.

In April last year, the Bank of Japan said a decade of ultra-low interest rates cost households 154 trillion yen in interest income. That may explain why Japanese are upset at seeing Fukui's investment more than double in value in seven years.

The adulation heaped on Fukui stems from three things: One, media adoration much like that bestowed on Greenspan. Two, the fact that he isn't Hayami. Three, Fukui's move in March to scrap Japan's five-year experiment with "quantitative easing" to pump up growth.

It's important to note that Fukui has done little that could be called extraordinary. Doing away with quantitative easing is a case in point. Fukui merely did what anyone would have done given the data sitting on his desk. Clear signs emerged that deflationary pressures were waning and the Bank of Japan did the obvious.

And somehow, Fukui is seen as a genius.

Perhaps Fukui is a genius. Maybe he really is the only man for the Bank of Japan job, in the same way many investors saw Greenspan as the only policymaker who could have guided the US during the 1990s. Yet can we really say that given the evidence - given Fukui's limited track record? I don't think so.

Once Fukui raises short-term rates from zero to 1 per cent or 2 per cent without bond and stock markets panicking and growth plunging, we'll talk. Until then, let's dispense with the chatter about Japan crumbling without Fukui.

It's simply not true.

* William Pesek Jnr is a columnist for Bloomberg News. The opinions expressed are his own.