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Bank of Japan acting boss warns on rate assumption

21/03/2008 - 13:34

By Hideyuki Sano

TOKYO (Reuters) - Acting Bank of Japan Governor Masaaki Shirakawa said on Friday that dealing with global market turmoil was his top priority, but warned those expecting a cut in interest rates that he has no preconceptions on where to take monetary policy.

Japan has entrusted the BOJ to Shirakawa, its first temporary governor in more than 80 years, as central banks work together to combat a credit crisis and calm gyrating markets.

"To appropriately deal with the turmoil in international financial markets triggered by the U.S. subprime loan problems is the most important task," Shirakawa told reporters on his first news conference in the job.

Shirakawa, a former BOJ official returning to the central bank as a deputy governor, landed in the hot seat after parliament twice failed to agree on a replacement for the previous governor before he retired on Wednesday.

The failure to find a new permanent leader for the central bank in the world's No.2 economy has raised new doubts about the leadership of Prime Minister Yasuo Fukuda, whose popularity was already sliding because of policy deadlocks in parliament.

Investors have priced in around a 30 percent chance of a rate cut by the BOJ by June and Goldman Sachs said this week a cut may come as early as Shirakawa's first rate review on April 8-9.

But other economists, noting Japanese rates are already at rock bottom, are not so sure the BOJ will cut its main policy rate from 0.5 percent and Shirakawa also warned against any assumptions.

"When the economy changes, it changes very fast in both directions. So we shouldn't have any preconceptions on future monetary policy," he said, reaffirming the central bank's forecast that the current slowdown did not change the trend of gradual growth.

"The economy is slowing down and it will slow down for the time being but it will start expanding moderately after that, although I don't know exactly when that will happen," he said.

"That is the basic scenario. But at the moment there's also much uncertainty."

Shirakawa, working in comparative obscurity as a university professor until his appointment, returns to the central bank after a gap of more than a year. His nomination left many analysts struggling to classify his views on interest rates.

BIRDWATCHING

An avid bird watcher, the new acting governor rejected labeling as either a monetary policy hawk or dove.

"People often say doves and hawks in monetary policy but I feel sorry for birds for such an easy labeling," he said.

Analysts have called for a quick decision on a permanent head for the central bank but Japanese media say an appointment may not be made until early April. Shirakawa declined to comment on the row.

The political fight pits the government, which twice nominated former finance ministry officials to replace retiring governor Toshihiko Fukui, against opposition parties that want to break links between the ministry and the central bank.

The opposition won control of parliament's upper house in an election last July, giving it power to veto senior appointments, including the top positions at the Bank of Japan.

Underlying the succession crisis is a rapidly weakening U.S. economy that prompted the Fed to slash interest rates by 0.75 percentage point on Tuesday, with Wall Street expecting more to come.

The big Fed rate cut sent the dollar soaring to its biggest one-day rise against the yen in nine years, taking it back toward 100 yen from a 13-year low below 96 yen seen on Monday.

Shirakawa said the dollar's decline because of the U.S. subprime housing crisis was an issue he would have to watch.

"If these moves accelerate, that would have a negative impact on the international financial markets as well as on the U.S. economy," Shirakawa said.

Japanese media have been scathing about the political gridlock and Fukuda's difficulties have eroded his public support, boosting an opposition drive for an election for the powerful lower house much earlier than the deadline next year.

With fellow Deputy Governor Kiyohiko Nishimura's former position on the BOJ policy board also vacant, the deadlock over the governor means there are just seven members, rather than the usual nine.

(Writing by Rodney Joyce; Editing by Michael Watson)


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