April 9 (Bloomberg) -- The Bank of Japan's new Governor Masaaki Shirakawa said growth will keep slowing as rising oil and commodity prices weigh on the world's second-largest economy.
``Higher energy and raw-materials costs are causing the economy to slow now,'' Shirakawa, 58, told reporters in Tokyo today after the bank cut its economic assessment for the first time in four months and kept the key interest rate at 0.5 percent. ``The mechanism of production, income and spending is weakening, but it's not as if it's fallen apart.''
Shirakawa's appointment was approved by parliament today, ending the first leadership vacuum in more than 80 years and following weeks of wrangling between Prime Minister Yasuo Fukuda and opposition leaders over whether to select central bankers with backgrounds at the Finance Ministry. He becomes governor just in time to attend this week's Group of Seven meeting of finance officials in Washington.
``The public is getting tired of this childish political battle,'' said Tomoaki Iwai, a political science professor at Nihon University in Tokyo. ``It reveals both the divisions within the DPJ and Fukuda's inability to realize the political consequences of his actions.''
Hiroshi Watanabe, the government's nominee to replace Shirakawa as deputy, was rejected by the upper house of parliament because he worked at the ministry.
Threatens Independence
Members of the Democratic Party of Japan, who control the upper house, say employing former Finance Ministry officials on the policy board would threaten the bank's independence and amount to parachuting former bureaucrats into government posts.
Japan's Chief Cabinet Secretary Nobutaka Machimura said that it's good for central bankers to have Finance Ministry experience because they must coordinate monetary and fiscal policy. He also rejected an assertion by DPJ Secretary General Yukio Hatoyama yesterday that Watanabe's appointment would amount to ``amakudari,'' or reserving top government posts for former bureaucrats.
``I don't understand it,'' Machimura said. ``Calling this amakudari is nonsense.''
Shirakawa, who has been deputy since March 12 and acting chief since Fukuda failed to appoint a successor to Toshihiko Fukui a week later, indicated he's flexible about policy.
``It's not appropriate to have any preconceptions about the direction of monetary policy right now,'' Shirakawa said. The economic outlook is filled with uncertainties that could quickly subside, the governor said, adding that he expects growth to eventually pick up.
`Hawkish Line'
``Mr. Shirakawa is probably succeeding Mr. Fukui's slightly hawkish line, but he certainly has to be very flexible in response to changing economic conditions,'' said Tomoko Fujii, head of economics and strategy for Japan at Bank of America Corp. in Tokyo. ``The economy is set for a full-fledged slowdown.''
To assess the levels of the country's borrowing costs, it's necessary to look not only at short-term interest rates but also longer-term rates, Shirakawa said.
The yield on Japan's 10-year bond fell to 1.215 percent on March 26, the lowest in more than two years. The yield rose 1 basis point to 1.34 percent at 4:50 p.m. in Tokyo on speculation the bank will be reluctant to cut rates.
Companies have become ``cautious,'' the central bank said today, a week after its Tankan survey showed confidence among large manufacturers fell to a four-year low and businesses plan to reduce investment. Attention needs to be paid to developments in other economies, global financial markets and the effects of high energy and raw materials prices, it said.
Wait-and-See
``The Bank of Japan will have no other choice but to keep interest rates on hold for a long time, given that economies are slumping at home and abroad,'' said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo.
Most economists expect the Bank of Japan to maintain a wait-and-see stance this year, according to a Bloomberg News survey. Of 30 economists surveyed, four predict a cut by December and three expect an increase. The remaining 23 said borrowing costs would stay on hold in 2008.
Shirakawa worked at the central bank for 34 years before leaving to teach economics at Kyoto University in 2006.
As a Bank of Japan executive director, Shirakawa supervised policy when the bank stopped injecting extra cash into the economy to overcome deflation, known as quantitative easing, and raised the overnight lending rate from near zero two years ago.
He earned a master's degree in economics from the University of Chicago and worked at the central bank's New York office between 1994 and 1995.
The Democrats' rejection of Watanabe comes after the party blocked Toshiro Muto and Koji Tanami for governor last month, also because they worked at the ministry.
Fukuda's popularity plunged to the lowest since he took office in September after the top position became vacant, according to a Mainichi newspaper survey published April 7.
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