/www.bloomberg.com/ By Mayumi Otsuma
Tokyo, Feb. 20 (Bloomberg) -- Japanese Prime Minister Junichiro Koizumi has pleaded with central bank chief Masaru Hayami for two years to do more to stem a decade-long decline in the world's No. 2 economy.
He won't have to beg much longer: Hayami's five-year term ends March 19, and Koizumi will handpick his successor. Investors expect the new Bank of Japan chief to be more willing than Hayami to stimulate the economy by buying government bonds. That may lift confidence in a country wracked by falling prices, stalled growth and about $440 billion of bad loans.
``All hopes are being pinned on the new Bank of Japan governor,'' said Yuuki Sakurai, who helps manage 1.7 trillion yen ($14.3 billion) of fixed-income assets at Fukoku Mutual Life Insurance Co. ``The new chief is being regarded as a Superman who can rescue the Japanese economy.''
At the least, a new Bank of Japan leader picked by Koizumi may end a standoff between the government and the bank that's eroded investor confidence. Hayami, 77, says he's done all he can to spur growth during his term: He cut interest rates to near zero, tripled bond purchases from banks and began buying stocks from lenders in November.
That hasn't reversed a six-year slide in lending or revived growth. Hayami has rejected Koizumi's calls to pump more cash into the economy, saying the government must first tackle the bad loans that keep banks from providing the fresh credit the economy needs to grow.
Falling Popularity
Appointing a new Bank of Japan head may help Koizumi as he seeks reelection as head of the ruling Liberal Democratic Party in September, some lawmakers and analysts said. His public approval rating fell 5 percentage points to 46 percent, a six-month low, because of his economic management, a recent opinion poll showed.
``Whether Koizumi's administration can survive or not depends on the appointment of the next Bank of Japan chief,'' said Kozo Yamamoto, a ruling-party lawmaker. ``This will be the last chance.''
Japan's bond market, the world's biggest, has rallied in the past 11 weeks as investors bet the new Bank of Japan leader will buy more bonds. The yield on the benchmark 10-year government bond fell to a record 0.75 percent on Jan. 30. It was unchanged at 0.865 percent as of 9:55 a.m. in Tokyo. A basis point is 0.01 percentage point.
Japan's economy and stock market need a boost. A 4 1/2-year bout of deflation has sapped corporate profits and pushed corporate bankruptcies to near a record high.
Stock-Market Slide
The exports that fueled last year's 0.3 percent economic growth are already flagging, and consumers and companies are paring spending. Japan's economy expanded an average 1.1 percent in the past decade, compared with 3.2 percent in the U.S.
About $1.8 trillion -- more than China's 2002 gross domestic product -- has been wiped from the value of stocks listed on the Tokyo Stock Exchange's first section since April 2000. The benchmark Nikkei 225 Stock Average slid to a 20-year low on Jan. 31, after losing about a fifth of its value last year.
Koizumi, who says he'll name Hayami's successor by the end of February, has signaled he'll choose someone who will take his policy cues.
``The government will work closely with the Bank of Japan to tackle deflation,'' Koizumi said late last month, the same day the government reported that unemployment rose to a record 5.5 percent.
Frontrunners
Koizumi hasn't offered any clues to his choice. Investors say candidates include Toshihiko Fukui, a former Bank of Japan deputy governor, and Nobuyuki Nakahara, a former central bank policy maker. Nakahara's proposal to set a target of pushing up prices was backed by some government officials -- and opposed by Hayami, who said it was unrealistic.
Some analysts expect Koizumi to pick a former Finance Ministry official such as Haruhiko Kuroda, another proponent of targeting inflation, or Mamoru Ozaki.
``Anyone appointed will likely be accommodative in their policy,'' said John Litschke, who helps manage $600 million in global equities at Loomis Sayles & Co. in San Francisco, including $25 million in Japanese stocks. ``Koizumi can't afford to lose confidence, and the positive expectations may provide a much needed band-aid to the stock markets.''
Investors will be looking to the Bank of Japan's new leader to help boost the stock market at a crucial time.
Bank Losses
At the fiscal year-end on March 31, banks will have to adjust the value of their stockholdings to account for falling prices, subtracting the losses from their capital.
Japan's seven biggest lenders had a combined 5.1 trillion yen in unrealized losses on their stockholdings as of Feb. 7, four times larger than on March 31 last year, according to Daiwa Institute of Research. Lenders whose capital falls below a required level may be forced to seek government bailouts.
Mizuho Holdings Inc., the world's biggest bank by assets, expects to post a 1.95 trillion yen group net loss for the year ending March 31 -- the largest ever for a Japanese company -- because of bad loans, the costs of an accelerated job-cut plan and stock-market losses.
While a new central bank chief may give Japan's markets an immediate boost, some investors say the economy may not follow. A Koizumi-led push to boost money supply by selling more government bonds to the central bank may even deepen Japan's economic slump by increasing government debt.
`Bad Habit'
Moody's Investors Service cut Japan's credit rating two levels to a sixth-ranked A2 in May, citing a public debt burden equal to about 140 percent of gross domestic product. That's the highest of any industrialized nation.
The government, investors say, needs to move faster to clean up 52.4 trillion yen of debts that have paralyzed the banking system. It must cut the flow of credit that's propping up insolvent companies and spur consumers to start spending again after a 20-month slide in wages, they say.
``It's been a bad habit of Japan's government to throw all the blame on the central bank,'' said Mitsuhiro Shima, who helps manage 500 billion yen of stocks and bonds at T&D Asset Management Co. ``The government could spend its budget money better, scrap regulations and revamp the tax system to spur corporate activity.''