Central bank chief refuses to surrender

When Fukui was appointed Governor of the Bank of Japan in March 2003, it was hailed as a timely decision as he, at the time, did not represent the closed-knit circle of the bureaucratic lineup of finance ministry or the central bank. Though he started his career at the central bank, Fukui eventually resigned from the bank to take up a senior position in a private sector think tank. He was serving as head of the Fujitsu Research Institute since 1999 after resigning from the post of deputy governor of the central bank, following a scandal.

As Japan's economic downturn in 1990s is largely seen to be the failure of economic and financial policies of the earlier decade, Fukui's appointment was supposed to bring fresh air of private sector management to the functioning of the central bank. This was expected to help Japan steer out of a difficult time. He was successful in putting the central bank on the right track which helped the government to implement structural reform in the financial sector, thereby bringing an end to the deflationary trend in Japanese economy thus paving the way for its eventual expansion.

It had been revealed by the Japanese media recently that in autumn 1999, the present governor of the Bank of Japan invested 10 million yen in a scandal-ridden fund, whose former head was arrested by the Tokyo prosecutors' office in early June for suspected insider trading. The matter came to light when an opposition member raised the question in the Diet. Fukui was later summoned to the Financial Affairs Committee of the upper house of the Diet where he said that he made the investment in autumn 1999, when he was Chairman of a private sector think tank. He admitted that his 10 million yen investment in the Murakami Fund had caused public uproar, but refused to step down, prompting intensified calls from the opposition members of the Diet for him to do so. But Prime Minister Junichiro Koizumi stated that he had no plans to replace Fukui, saying that there was no problem with Fukui's investments as long as they do not violate the rules. The Bank of Japan Chief is for the time being finding himself relieved of much of that pressure. But financial analysts in Japan are suggesting that despite the strong support extended by the government, Fukui's resignation might eventually turn out to be a matter of time.

The Bank of Japan influences stock prices and interest rates through the mechanism of its day-to-day adjustment of funds in the banking system. For monetary policy to gain support, public trust in the central bank's independent and neutral position is vital. As a result, if the chief of the bank himself gets involved in investment in a private fund, the neutrality of the central bank might become questionable. This is what exactly happened in Fukui's case.

The Bank of Japan in-house rules clearly stipulate that the employees of the Bank should refrain from private investment activities, if there is even the slightest possibility of raising public suspicions. Fukui is claiming that he made the investment when he was chairman of Fujitsu Research and there is nothing wrong with a private citizen making investment through appropriate channels. But the ethical question that those demanding his resignation are asking is, was it right for Fukui to continue accepting returns form his investment even after he became governor of the central bank?

The fund that Fukui had invested in was criticised by some quarters for seeking only to make quick profits by buying company shares and then selling them at higher prices. The media in Japan is speculating that Fukui's investment in Murakami Fund might have ended up earning him an annual dividend of more than 20 percent of the total investment. Critics are now pointing out that this particular side of his personal financial dealings might have run contrary to what is usually expected from a central bank chief.

The Bank of Japan's quantitative monetary easing policy with zero interest rate was implemented with the idea of shifting money from its interest-free current account deposits to equities and other financial assets. But the stock markets, particularly those for the start-up, came close to becoming gambling houses; as a result, the mere fact that the central bank chief took part in a money game is seen by many as a grave matter.

As this kind of investment is affected greatly by monetary policy controlled by the governor of the Bank of Japan, Fukui's investment in Murakami Fund also raises ethical questions. In a number of western countries monetary policy chiefs are prohibited from having any kind of business dealings with investment funds and share market speculators. Such dealings might be seen by ordinary citizens potentiality of inspiring the policy-makers resorting to preferential treatment extended to them. Though Fukui has denied having any direct link with the Murakami fund, there is no doubt that the policy guidelines that he oversees have a huge impact on such funds. As a result, even if we presume that he remained well clear from influencing such decisions, the mere fact that he had a significant amount of investment simply creates an uneasy situation. It is more so because nobody makes an investment just to see the money lying idle or losing its value. Profit is the ultimate goal that fuels the desire for investing money.

As a result, even if Fukui is cleared of any accusation of wrongdoing or having his hands tainted, the fact that he kept the investment rolling long after he became the chief of the central bank would continue to create an uneasy situation where it would be difficult for outsiders to get rid of suspicion. Hence, the best way for him, no doubt, is to take the blame for the serious mistake and look for an honorable exit before the issue turns out to be a topic for more heated discussions.