By Leika Kihara and Yoko Nishikawa
TOKYO, March 11 (Reuters) – The government’s pick to head Japan’s central bank said on Tuesday he would be an independent governor at a critical time for the economy, but a senior opposition lawmaker warned that his appointment could be vetoed.
Toshiro Muto, currently a deputy governor at the Bank of Japan (BOJ), appeared in parliament after being nominated to replace governor Toshihiko Fukui, who retires next week.
Opposition parties who control parliament’s upper house have threatened to block the former finance ministry bureaucrat because of his ties to the government, raising the risk of a monetary policy vacuum at a time of financial market volatility.
Muto’s comments echoed those of cabinet ministers on Tuesday and supported the government’s argument that its nominees for the posts of governor and two deputies should be confirmed without delay as fears grow of a U.S. recession.
“Japan’s economy is at a critical stage as it faces various risks at home and abroad,” Muto told a hearing in parliament’s lower house. “Signs of a U.S. economic slowdown are intensifying and downside risks for the global economy are rising.
“I would strive to gain the public’s trust and ensure the BOJ’s independence,” he said.
But Yoshito Sengoku, a senior lawmaker in the main opposition Democratic Party, told reporters Muto had not persuaded those planning to reject his appointment to change their minds.
“He answered as if he was an honour student, and it did not dispel our concerns,” said Sengoku.
GROWING RECESSION FEARS
The political wrangle over who should lead the central bank has raised concerns about a vacuum in monetary policy amid fears that Japan may follow the United States into recession.
“If the Democrats vote down the candidates, it will be negative for financial markets,” said Takeshi Minami, chief economist at Norinchukin Research Institute.
“With heightening concerns about a deepening U.S. economic slowdown, market participants will be faced with another concern that the BOJ’s moves could fall behind the curve.”
The row has added to political paralysis in Japan that has sent Prime Minister Yasuo Fukuda’s popularity sliding.
Key officials from the Democratic Party say appointing a former top finance ministry bureaucrat such as Muto as governor would undermine the BOJ’s independence.
Opposition officials will meet on Tuesday evening after Muto and the nominees for the two deputy governor posts — Takatoshi Ito and Masaaki Shirakawa — have appeared before panels of both houses of parliament.
On Wednesday, Japan is expected to sharply lower its growth estimate for the last quarter of 2007. Economics Minister Hiroko Ota warned on Tuesday of rising risks for Japan.
“The U.S. economic slowdown appears to be deepening, but it is still uncertain whether there is going to be a recession,” Ota told a news conference after a cabinet meeting.
Under Fukui, the central bank has said it intends to raise rates gradually, but the U.S. subprime housing loan crisis and a gloomier outlook have tied its hands.
RATE CUT AHEAD?
The BOJ has left its main policy rate at 0.5 percent for more than a year, with investors pricing in a roughly 55 percent of a rate cut by the end of the year.
“Looking at Japan’s economy, in addition to falling housing investment due to tighter construction rules, the earning environment for smaller firms is worsening and prices of daily necessities are rising due to rising raw material and energy costs,” Muto said in parliament.
Muto, 64, has gained respect from BOJ staff in his five-year term as deputy governor and polls show he has the approval of markets.
While seen by some as less hawkish than Fukui, Muto has voted with his boss at every rate review since joining the BOJ.
If his nomination is rejected by the upper house the government may install a temporary governor while it seeks a long-term solution.
It could appoint Muto as temporary head of the central bank, which would not require parliamentary approval.
Another scenario being floated is for parliament to endorse Shirakawa, the least controversial of the nominees for deputy governor, who could then be appointed as temporary governor.
However, analysts say such stopgap leadership of the central bank could leave it in a policy vacuum and unwilling to make long-term decisions.
Finance Minister Fukushiro Nukaga stressed on Tuesday that a vacuum was not an option and said the government should stick with Muto, even if he was vetoed.
“If the government’s nominees were rejected we would make the utmost efforts such as re-proposing them to win parliament’s backing,” Nukaga told reporters.
Ito also faces possible rejection by opposition lawmakers.
An academic who serves on a top government economic advisory panel, he is a firm backer of an inflation target for the central bank, a cause he took up in comments to parliament on Tuesday.
