Bank of Japan is without a chief

The top job at Japan’s central bank was vacant today after opposition parties rejected Prime Minister Yasuo Fukuda’s latest nominee for governor, raising doubts about the ability of the world’s second-largest economy to play a role in containing the crisis roiling the global financial system.

The failure to find a replacement for the outgoing governor, whose five-year term expired Wednesday, underscores the disarray in Japanese politics and delivered a humiliating blow to an already beleaguered government.

With the opposition controlling Japan’s upper house, the country is locked in a stalemate that has raised doubts about the Fukuda government’s ability to manage economic policy.

“There is no direct damage to the way the Bank of Japan operates, but this does do damage to Japan’s international reputation,” said Takahiro Sato, chief Japan economist at Morgan Stanley in Tokyo. “This has been a train wreck that raises the risk perception of the Japanese market for foreign investors.

“A general election cannot come soon enough,” Sato said.

Japanese business groups condemned the two main political parties for the confrontation. But increasingly, critics are training most of their fire on Fukuda, 71, a politician once regarded as a pair of sure hands but whose plunging popularity reflects worries about the political drift.

Japan’s widely read weekly magazines mock the government as “brain-dead.” And members of Fukuda’s Liberal Democratic Party have begun to question his leadership.

Fukuda’s handling of the Bank of Japan vacancy further perplexed observers.

The opposition Democratic Party of Japan and its allies have an effective veto over the appointment of a new governor because they control parliament’s upper house. The party made it clear it would not accept a candidate with strong ties to the Finance Ministry, arguing the bureaucracy’s long, cozy relationship with the LDP would undermine the central bank’s independence.

Yet Fukuda twice proposed candidates who had held senior positions in the ministry. Koji Tanami, head of the Japan Bank for International Cooperation, was rejected Wednesday to replace governor Toshihiko Fukui. Toshiro Muto was rejected last week.

“I have really started to doubt the credentials of Mr. Fukuda as prime minister,” said Eisuke Sakakibara, a former top ministry official and now a professor at Tokyo’s Waseda University.

The leadership vacuum at the bank comes as it considers whether to cut its already minuscule prime lending rate of 0.5%.

The bank has been chafing to raise interest rates. But the government is looking to stimulate an economy that it acknowledges has stalled.

Data suggest the Japanese economy is sluggish at best and perhaps tipping into recession. Consumer confidence continues to decline. And industrial production, seen as a reliable measure of the economy’s health, is contracting.

The central bank standoff adds to the sense that Japanese leaders are being sidelined as the global financial crisis deepens.

“It is important for the international community to know whose hand is on the tiller of monetary policy,” U.S. Ambassador J. Thomas Schieffer said last week when asked about the stalemate over the central bank.

Deputy governor Masaaki Shirakawa will oversee operations at the bank until a new chief is found.

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bruce.wallace@latimes.com