The victor emerges

Bank of Japan veteran Masaaki Shirakawa brings a wealth of experience to the central bank's top job, after a drawn-out battle for the post. By Malan Rietveld


Fielding predictable questions over whether he is a monetary policy hawk or dove, Masaaki Shirakawa was non-committal at his inaugural press conference. "I do not like to be called a hawk or a dove," said the new governor of the Bank of Japan (BoJ). "I feel sorry for the birds, as I am a bird watcher."

This mildly irritated response to a simplistic categorisation is perhaps not surprising. But given that Shirakawa's name only emerged towards the end of a bruising political battle over the appointment of Toshihiko Fukui's successor, the media's curiosity is also understandable. Just who is the man taking over the reigns at the central bank of the world's second largest economy? What can be expected from him in terms of policy and leadership? How is he likely to be perceived by the markets and by central bankers around the world?

For once, the closest observers of the BoJ agree: Shirakawa's pedigree is excellent. Indeed, many would argue that, at least on paper, he is the most qualified governor yet. His academic training included two years at the University of Chicago, where he received a masters degree in economics in 1977, after first joining the BoJ in 1972. In the Windy City, he took classes under some of the biggest names in academia

Next generation

After graduating, Shirakawa returned to the central bank and immediately made his stint in the US felt. As a young economist at the central bank, Shirakawa was instrumental in introducing rational-expectations theory and an emphasis on monetary aggregates into the economic models of the BoJ, say Masaaki Kanno and Masamichi Adachi, economists at JP Morgan in Tokyo. These theories were associated with the University of Chicago and strongly influenced Japanese monetary policy in the 1980s.

Over the next three decades, Shirakawa would gain extensive experience of the central bank's internal structures, serving in various capacities under its rotation system. He was appointed adviser to the governor in December 1997, first on credit and financial markets (1997-2000) and then on policy planning (2000-2002). Among other responsibilities, he drafted speeches and press conference responses for the governor.

In July 2002, Shirakawa started a four-year term as an executive director. When this term expired in July 2006, Shirakawa briefly left the BoJ to take up a position as a professor of economics at Kyoto University. Observers cite his experience and understanding of the Bank of Japan's often-unique policy-making process and his familiarity with leading internal debates as a particular strength. He is very much seen as a career central banker. Takashi Omori, an economist at UBS, says Shirakawa is a "well-known and well respected central banker".

In fact, since Shirakawa's term as an executive director ended a mere 18 months ago, the new governor will be seen as "approachable from the perspective of the currently serving Bank of Japan bureaucrats", says Hiro Shirakawa (no relation), an economist at Credit Suisse in Tokyo. The Credit Suisse man worked with the current governor at the central bank from 1997 to 1998

But although Toshihiko Fukui and Masaru Hayami, the two previous governors, also had long careers at the central bank, Shirakawa - 14 years younger than his predecessor - is likely to be seen as belonging to the next generation of central bankers in Japan, adds the economist.

Kanno and Adachi agree. "Shirakawa differs from his predecessors in having a record of published articles as a central bank economist and monetary-policy administrator," they say.

Indeed, Shirakawa's appointment has led to intense interest in a textbook he wrote that was published in March, Modern Monetary Policy. The book has given observers rare insights into the new governor's thinking, even if Shirakawa has stressed that he produced its contents during his stint at Kyoto University and that it is therefore not necessarily indicative of how he will act as governor.

One aspect of the book that has received particular attention is Shirakawa's discussion of the contentious relationship between monetary policy and asset-price bubbles. "Shirakawa's book presented two different views on monetary policy in its relation to asset prices, which he dubbed 'the Fed view' and 'the Bank for International Settlements (BIS) view'," say Kanno and Adachi.

The Fed view, associated with the policies and arguments of Alan Greenspan, the US Federal Reserve's previous chairman, emphasises the role that monetary policy should play after a bubble bursts, given the complexity of identifying the existence of asset-price bubbles.

The BIS view, on other hand, is associated with research by influential economists at the BIS, notably William White and Claudio Borio. It suggests that, because the damage from the bursting of an asset bubble is too big and costly to be absorbed, monetary policy should be conducted in a way that prevents an asset bubble from developing in the first place.

"Shirakawa appears sympathetic with the BIS view, probably from his personal experience of two Japanese bubbles (in the mid-1970s, then the late 1980s and early 1990s)," say Kanno and Adachi. While he did not refer to the current credit crunch in particular in his book, they say, the episode appears to have convinced Shirakawa even more than before that the 'BIS view' is correct, since the cost of the bursting of the recent credit bubble is proving far larger than expected.

Other economists agree. Translating a passage from the book, Credit Suisse's Shirakawa says his namesake has argued: "In addition to monitoring 'traditional' macroeconomic variables such as the output gap and inflation, a central bank must also be on the lookout for signs of 'financial disequilibrium'. This is not to say that 'bubbles must be burst', but rather that care must be taken to ensure that the economy is growing in a balanced and sustainable fashion over the long run. In cases where this balance appears to be threatened, a central bank must be prepared to tighten monetary policy even if the inflation rate remains relatively low."

Global contribution

Another significant advantage of Shirakawa's appointment is that he is likely to be a strong contributor on a global scale, when sharing the stage with governors of other central banks. The current crisis, with its global impact, has underlined the importance of international cooperation, both in terms of analysis and policy responses.

Most observers expect Shirakawa to be in a position to raise the profile of the Bank of Japan in these discussions. Omori says he expects Shirakawa to "play a leading role in restoring the stability of the global financial market". Shirakawa's strong command of the English language will also enable him to continue the trend started by Fukui towards clearer and more consistent communication with the financial markets.

Given the turmoil that surrounded Shirakawa's appointment, it seems remarkable that the BoJ ended up with such an acclaimed and experienced governor. From an explosive situation where the issue became a political bargaining chip, Shirakawa's appointment has laid the foundations for stability at the central bank. The fact that he ultimately proved acceptable to both sides of the struggle is testament to the respect he commands.

This article first appeared in another Incisive Media publication, Central Banking, in May 2008 and was authored by Malan Rietveld.

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