Tokyo, Feb. 26 (Bloomberg) -- Junichiro Koizumi's choice of a central-bank governor marks the Japanese prime minister's latest retreat from promises he's made to shake up his country's economic institutions, some investors said. Fitting a pattern of back downs that has characterized his 22 months in office, Koizumi pledged he'd pick an ``aggressive deflation fighter.'' Instead, he chose Toshihiko Fukui, a 40-year central-bank veteran who has criticized proponents of inflation targeting. ``Koizumi pretends he will change things,'' said Akihide Kinugawa, who helps manage 20 billion yen ($171 million) at T&D Asset Management Co. ``He makes a bluster about acting but takes the safe path in the end.''
Koizumi, once Japan's most popular prime minister, has seen his approval ratings sag in tandem with the dimming prospects of a revival of the world's second-biggest economy. He has so far failed to deliver on a promise of ``reform without sacred cows,'' breaking his own cap on government borrowing, leaving the postal monopoly intact, and encouraging banks to keep failing retailers and construction companies alive. The prime minister's failure to implement most of his proposals since coming to office in April 2001 has left him with even fewer options now that the economy's recovery from a third recession in a decade has stalled. ``If he really wants to spur economic growth now, he has no other choice but to shelve his priority of structural reforms,'' said Mamoru Yamazaki, chief economist at Barclays Capital Japan Ltd. ``But if he drops it now, that would probably affect his approval rating, which is the basis of his clout.''
Ratings Drop
Koizumi's approval rating has dropped for a fifth month, to 49 percent, according to a survey by the Yomiuri newspaper. That's down 3.9 percentage points from January. Any further slide increases the chance that Koizumi may face challenges from within the ruling Liberal Democratic Party when he stands for its presidency in September, analysts and an LDP politician said. ``The downside risks that the Koizumi administration may be in danger are increasing,'' said Yoshimi Watanabe, an LDP member of parliament. ``The chances are increasing that his administration may get shaken up'' because of his failure to develop and implement a clear policy line, Watanabe said.
The nomination of a new governor and two new deputy governors for five-year terms at the Bank of Japan offered Koizumi one of his biggest opportunities yet to put his stamp on the economy. ``If there is an appropriate person from the private sector, that would be very desirable,'' Financial Services Minister Heizo Takenaka said in December.
`Old Boy'
In the weeks running up to Monday's announcement of Fukui to the top post, Koizumi and senior ministers debated the merits of setting an inflation target to halt almost five years of falling prices. The use of an inflation target implied having the central bank inject cash into the economy until prices rose by a set amount over a certain period of time. In the end, though, Koizumi's choice was 67-year-old Fukui. The former central-bank deputy governor, who attended the elite law faculty at Tokyo University, even describes himself as ``an old boy.'' He expressed surprise that Koizumi might consider someone of his age, according to file footage aired by Asahi television this week
. ``The fact that Fukui was chosen shows how bad the state of the government is: yet another old boy, no new life, no new nothing, just more of the same, slow rot,'' said Edwin Merner, president of Atlantis Investment Research Corp. in Tokyo, which manages $600 million. Shigenori Okazaki, chief political analyst at UBS Warburg (Japan) Ltd., said Koizumi's failure to select someone from the private sector to head the central bank indicates his sway over his own party may be waning.
Harmless
``This appointment suggests Koizumi's influence within the party and government has declined,'' Okazaki said. ``Koizumi basically ended up with the most harmless selections.'' Koizumi nominated two career bureaucrats -- former Vice Finance Minister Toshiro Muto and Kazumasa Iwata, a Cabinet official -- to be the new deputy governors. All three selections require parliament's approval.
The public will get its next chance to deliver its verdict when the country holds nationwide local elections in April. Koizumi doesn't have to call general parliamentary elections until June 2004. Koizumi has been forced to compromise on many of his pledges as the economy has shrunk.
Back Downs
In November, he abandoned his pledge to cap new government bond sales at 30 trillion yen, a year after Liberal Democratic lawmakers demanded extra spending to spur the economy. A government panel set up to stop unnecessary road building and other construction projects rarely meets. In the finance industry, the government's proposal to allow life insurance companies to cut promised returns to policyholders -- a way to shore up their finances -- didn't even make it to parliament. A plan to cut deposit insurance protection for banks was postponed on concern that smaller lenders would lose deposits. As for pledges to let sick companies fail, Daiei Inc., a retailer with about $13.5 billion in debt, was bailed out in October by lenders that included Development Bank of Japan, which is funded by public pensions and postal savings. For his part, Koizumi says he hasn't given up, arguing that there will be ``no growth without reform.'' ``The reforms are on the way and it will take some time before the results are clearly visible,'' Koizumi said in his policy speech to parliament in January. T&D Asset's Kinugawa, though, doubts Koizumi can deliver. ``Next time we may see lots of noise being made about such things as reforms to national health insurance -- without any real action,'' Kinugawa said//www./quote.bloomberg.com