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Japan sets deadline on central bank independence

TOKYO: Japan will forge a consensus by mid-June on how to make the Bank of Japan more independent, a key to future money policy.

The ruling coalition aims to reach an outline on how to revise a 54-year-old law on the status of the central bank in the current session of parliament ending in mid-June, a senior coalition policy-maker told reporters on Friday.

The aim of the revising will be to beef up the bank's authority and make it more independent of its powerful supervisor, the Ministry of Finance.

"It is necessary to legally ensure that the Bank of Japan has independence to a level equal to that of central banks of other Group of Seven nations," said Shigeru Ito of the Social Democratic Party.

"The underlying trend is to change the Bank of Japan law as well as financial administration. We must not allow to end up with discussions alone without any actions," Ito told reporters.

The move is in line with political pressure to weaken the authority of the Finance Ministry, under fire for its alleged mishandling of Japan's banking problems, the Daiwa Bank bond loss debacle last year and a series of scandals involving ministry officials.

Ito, who heads the coalition party's task force to seek reform of the ministry, said Bank of Japan Governor Yasuo Matsushita supported the idea at an earlier meeting on Friday.

Central bank officials have long called for revision of the law, which gives the Finance Ministry authority to supervise them. The law was revised in 1949 to allow the bank to set up a supreme decision-making body in managing monetary steps, chaired by its governor. But this was insufficient to convince markets it was fully independent.

A possible revision of the law could hold a key to future monetary tightening, as it could give the bank more of a free hand to fight inflation, although uncertainty remains over whether it would escape pressure from politicians.

In past economic recoveries, when the bank has wanted to tighten credit it has usually had to fight the ministry, which prefers to keep interest rates low to maintain economic growth.

The bank has admitted it was partly responsible for the economic "bubble" of inflated asset prices that began in the late 1980s, by having kept interest rates too low for too long in face of heavy political pressures to stimulate the economy.

There is already a tug-of-war between the two over whether to tolerate the recent gradual rise in market interest rates resulting from an upturn in Japan's economy.

Matsushita jolted Tokyo financial markets on Wednesday with remarks taken by traders as a sign that the bank may tolerate higher rates. It sent stock and bond prices down and pushed up the yen against the dollar.

Matsushita said it was natural for interest rates to rise on the back of expectations of economic recovery.

But the comment met with a denial from Finance Minister Wataru Kubo, who said later in the day that he saw no change in the bank's easy credit stance.

With emerging bright spots in the economy, the time may be approaching for the bank to consider when and how to end the era of easy credit, but few expect a tightening to come soon.

Given lingering uncertainty over its feeble economic recovery, Japan has no need to alter its five-year soft credit stance, analysts said. The bank last cut the official discount rate, a key rate it charges on loans to commercial banks, to a record low 0.5 percent last September, the ninth cut since July 1991.-Reuter