The Ministry of Finance should have been shocked when the government announced plans to nominate Masazumi Wakatabe, an advocate of a tax hike postponement, as a candidate to one of the two deputy governor seats at the Bank of Japan on Feb. 16. But senior officials at the ministry were relieved, simply because this personnel reshuffle managed to contain discussions on what MOF Administrative Vice Minister Junichi Fukuda and other officials deemed an issue of critical importance: the topic of reviewing a joint statement (accord) which the government and the BOJ signed in 2013.
The spirit of the accord was that while the government works closely with the BOJ to achieve a 2% inflation target, it also works to rebuild finances in preparation for an exit plan in the future. But Etsuro Honda, who was often rumored to be a leading candidate for BOJ governor or deputy governor, had long made a surprising argument, demanding this provision be struck out and the nation shift to an expansionary fiscal policy.
At the end of last year, MOF became increasingly nervous because there was a possibility that “Governor Honda” might become a reality. In the summer, MOF confirmed with Governor Haruhiko Kuroda his intention to stay in the post through Finance Minister Taro Aso. But Honda directly approached Prime Minister Shinzo Abe and called for a “personnel reshuffle.” Suspicion grew within MOF that the governor post might go to Honda.
When Kuroda’s reappointment as BOJ governor became almost certain in January, Honda became a front-runner candidate for deputy governor. Aso told the Prime Minister’s Office [Kantei] that the “organization will not function if there is a person who speaks ill of the leader.” Over the filling of one of the two Deputy Governors seats, which is allocated to the BOJ, he allied with the BOJ and opposed Honda’s proposal to appoint Hiroshi Nakaso, not BOJ-backed Masayoshi Amamiya, as deputy governor.
MOF traditionally wielded strong influence over the appointment of the BOJ governor, as the ministry and the central bank took turns in producing the governor. But this time the MOF leadership did not get involved in decision-making. There was even a time when it felt it “had little choice but to accept “Deputy Governor Honda” if Abe decided to pick him. Though Aso directly negotiated with Abe, MOF kept a low profile.
“MOF probably did not want to push the prime minister,” said a senior official at a ministry that oversees economic matters. MOF needs to get many things done this year, such as the drafting of a fiscal consolidation program and raising the consumption tax to 10%. All of these require the prime minister to make major decisions. The ministry came to the conclusion that even though it managed to protect the accord with the BOJ, that would prove fruitless if it provoked Abe’s disfavor. The MOF leadership has already shifted its focus to upcoming political events. (Abridged)