Shirakawa Moves to Demystify BOJ Policy in Transparency Push

By Mayumi Otsuma

Aug. 20 (Bloomberg) -- Bank of Japan Governor Masaaki Shirakawa, after four months on the job, is making one of the world's most opaque major central banks more transparent.

When policy makers kept the benchmark rate at 0.5 percent yesterday, they listed the reasons for the decision. Until July, they said nothing when they held rates steady. The bank is increasing the number of forecasts it publishes, and instead of just signaling the direction of borrowing costs during his press conferences, Shirakawa tries to explain his thinking about the economy.

The changes by the University of Chicago-educated Shirakawa, 58, bring the Bank of Japan into line with moves worldwide to help outsiders better understand how decisions are reached. Clear communication helps to anchor inflationary expectations and makes it easier for investors to predict rate changes, said Nariman Behravesh, chief economist at Global Insight Inc. in Lexington, Massachusetts.

``There is a sense of mystery about what the BOJ does, more so than with other central banks, so this is Japan's attempt to follow'' its counterparts, said Behravesh.

Shirakawa is tackling tradition even though he came to the job by default in April. Prime Minister Yasuo Fukuda's first and second picks were rejected by the opposition parties that control Japan's upper house of parliament. That left Shirakawa, who became deputy governor only weeks earlier.

Building on Fukui

Japan's central bank has been independent from the government for only 10 years, and Shirakawa's predecessor, Toshihiko Fukui, 72, made some moves toward transparency. In July 2005 the bank started publishing the number of votes for and against a move at the time it announced a decision. In February 2007, it began to identify, on the day of the decision, how each member voted.

Shirakawa has already established a style that some economists welcome for its clarity.

He ``provides detailed explanations and solid logic, though his language is more boring than Fukui's,'' said Mari Iwashita, chief market economist at Daiwa Securities SMBC in Tokyo. ``He also tries to avoid comments'' that may mislead markets, she said.

Iwashita cites the June 13 press conference as an example. Asked about the risks of rising commodity prices on inflation, Shirakawa said the bank was more focused on their effect on growth.

His answer damped speculation that he might raise borrowing costs after a report two days earlier showed producer prices climbed at the fastest pace in 27 years.

Treading Carefully

``Shirakawa carefully avoided commenting on inflation risks and instead underlined that Japan's economic situation is different from those of the U.S. and Europe,'' Iwashita said. ``If it had been Fukui, he would have made more hawkish remarks.''

Benchmark 10-year bond yields retreated after he spoke, falling to 1.74 percent in the following week from 1.88 percent before the briefing.

The steps toward more openness follow greater disclosure at other central banks. In May 2007, Sweden's Riksbank started holding press conferences after all meetings. In November, Ben S. Bernanke increased the number of forecasts the Federal Reserve issues each year to four from two.

Giving Up Secrecy

``At last, major central banks have given up secrecy,'' said Allan Meltzer, a Carnegie Mellon University professor who was an honorary adviser to the BOJ between 1986 and 2002.

For all the efforts at transparency, Shirakawa said he doesn't plan to flag rate decisions, in contrast with ECB President Jean-Claude Trichet, who has used the phrase ``strong vigilance'' to indicate increases.

``De facto announcement of the future level of the policy interest rate means disregarding the changes in economic conditions after such an announcement,'' the governor said in a July 18 speech.

Central banks' efforts to be more open have sometimes backfired.

In April 2006, Bernanke said the Fed might suspend rate increases even if risks between inflation and growth weren't ``entirely balanced.'' Some people said this meant he was less worried about inflation, only to find in August that the Fed still identified prices as its chief concern.

Nakagawa Request

An increase in transparency may help to insulate the BOJ from political interference. Three days before the policy board met in January 2007, Hidenao Nakagawa, then the ruling Liberal Democratic Party's secretary general, said the government might ask the bank to postpone a rate increase in comments interpreted at the time as an attempt to meddle in the board's decision.

At the meeting, the bank held the benchmark rate at 0.25 percent, waiting until the following month to double it.

``With a clearer picture of the BOJ's intentions, investors can be more confident about their own forecasts, which makes it harder for politicians' comments to sway markets,'' said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management in Tokyo.

Of 26 economists surveyed by Bloomberg News this month, 21 said there will be no increase in borrowing costs by June 2009, four projected higher rates and one forecast a cut.

``Shirakawa's true test will be whether he can properly manage investors' expectations when the bank starts to prepare for a rate-policy change,'' said Seiji Adachi, a senior economist at Deutsche Securities in Tokyo. ``That we have yet to see.''

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net