Greenspan's Glasnost Comes to Tokyo Just in Time: William Pesek

Commentary by William Pesek

Aug. 21 (Bloomberg) -- An extraordinary thing is happening in Tokyo: Bank of Japan officials are speaking Japanese.

Japan's central bankers always deliberate in their mother tongue -- just not in ways most of the nation's 127 million people could fathom. When Governor Masaaki Shirakawa steps to the microphone these days, he speaks in a clear, logical and forthcoming manner of which BOJ watchers are unaccustomed.

The latest sign that the kind of glasnost Alan Greenspan brought to the U.S. Federal Reserve is arriving in Japan came on Aug. 19. Shirakawa, who's just four months in the job, matter-of- factly listed the reasons policy makers kept the benchmark rate at 0.5 percent.

Shirakawa's attempts to demystify the BOJ go beyond that, as Bloomberg News reporter Mayumi Otsuma detailed in a story yesterday. Before July, the BOJ said nothing when leaving rates steady. The BOJ is increasing the number of forecasts it publishes, instead of signaling the direction of borrowing costs at press conferences.

Such efforts may do two things: Boost the BOJ's credibility and enhance its independence.

Much remains to be done to make Asia's biggest economy more open. Yet what's happening in Tokyo may be akin to the events of 1994, when the Fed began announcing rate changes rather than having monetary economists decipher things. The Fed also accelerated the release of the minutes of its meetings.

Greenspan Fed

It was nothing short of shocking for those schooled in winks, nods and secret handshakes of Fed watching. Greenspan's legacy was tarnished by the bubbles he aided and abetted before stepping down in 2006. History will look more kindly on how he helped democratize an undemocratic institution.

The Fed doesn't do press conferences like the BOJ or European Central Bank. Being able to ask questions means little, though, if they're met with econobabble. Japanese officials talk lots about the economy. They just rarely offer useful insights. Shirakawa, 58, wasted no time trying to make one of the most opaque major central banks more transparent.

Shirakawa is an accidental BOJ leader. He wasn't Prime Minister Yasuo Fukuda's first choice to replace Toshihiko Fukui. He wasn't even the second choice. Shirakawa was a bit of a desperation candidate.

Efforts by Fukuda's Liberal Democratic Party to replace Fukui, whose term ended in March, were thwarted by the opposition Democratic Party of Japan. Fukuda's first two candidates were shot down more out of political score-settling than policy differences.

The Right Guy

Ironically, Japan may have ended up with the right central banker at the right time. The University of Chicago-educated Shirakawa is hard to pigeonhole as an economist. Observers certainly have tried, yet so far he's proving to be more ad hoc than doctrinaire in his views.

None of this means Shirakawa's effort to open the BOJ to a curious world will work as planned.

``It remains to be seen whether this is going to help markets anticipate policy changes, but it should,'' says Richard Jerram, chief Japan economist at Macquarie Securities Ltd. ``The risk they have is that people start to focus on minor changes in wording of the post-meeting statements, as they do with the Fed.''

Sometimes the message gets lost in translation. Bad wording can have bond traders overanalyzing points officials didn't want to convey. Markets can move on poorly placed adjectives. A few years back, a Fed-watcher buddy of mine joked that he was using the sentence-diagramming skills the nuns taught him in grade school more than his economics degree.

BOJ Independence

This is a work in progress for the BOJ, and one should expect bumps along the way. Anything the BOJ can do to boost its credibility is worth a try. After all, how seriously can anyone take a central bank that's so compliant to politicians that it lowered rates to zero?

While the BOJ has been technically independent for a decade, it remains under the government's thumb. Talk about Shirakawa's predecessor being a maverick was bunk. In five years as governor, during which Japan was enjoying its longest postwar recovery, Fukui only managed to increase rates twice.

Given the dismal state of the global economy and Japan's slide toward a recession, higher rates aren't an option right now. Yet by telegraphing moves, Shirakawa can use markets to make politically unpopular decisions. With the eyes of the world on the BOJ and its challenges clearly articulated, politicians may have less latitude to control the central bank.

Glasnost in Tokyo

Of course, Shirakawa could end up playing with fire here. One false move -- like a big rate increase politicians don't like -- and his BOJ reforms could be over. Yet getting the BOJ out of the government's pocket is vital to Japan's future.

The reason politicians don't reduce the world's largest public debt or make big decisions about competitiveness, demographics and immigration is free money. It's the glue holding Japan Inc. together and the crutch that enables it to delay changes that should've been made years ago.

Ultra-low rates hold Japan back more than help it. A little glasnost in Tokyo could be just the thing.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net