By Mayumi Otsuma
Aug. 27 (Bloomberg) -- Bank of Japan deputy chief Toshiro Muto is less likely to become the next governor since the opposition won last month's election, casting doubt on the central bank's policy of gradually raising interest rates.
The number of economists predicting Muto will replace Toshihiko Fukui, whose five-year term expires in March, dropped to eight out of 15 last week from all 15 in June, according to Bloomberg News surveys.
The opposition Democratic Party of Japan's control of the Upper House allows it to block nominations for the job. That could reduce Muto's chances and increase those of someone who might break from Fukui's plans to increase borrowing costs. The DPJ disapproved of Muto's appointment as deputy governor in 2003, citing his background at the Finance Ministry.
``If the DPJ sticks to its argument, the possibility of Mr. Muto becoming the central bank chief would be low,'' said Mamoru Yamazaki, chief economist at RBS Securities Japan Ltd. in Tokyo. ``But he still has a chance; whether he can win the trust of the DPJ by March will be key.''
Muto, 64, formerly the Finance Ministry's top official, has said the bank needs to raise rates gradually as the world's second-largest economy expands, signaling he'd continue Fukui's policy if selected.
The Cabinet's nominations of the governor and two deputies require the approval of both houses of parliament, according to the Bank of Japan Law. The Democrats oppose the practice in Japan of bureaucrats landing new senior positions at public and private institutions after their retirement.
Reluctant Support
The party's Secretary General Yukio Hatoyama and Vice President Naoto Kan suggested after the election that they would be reluctant to support Muto should he be nominated.
Hatoyama recently softened his stance, telling reporters on Aug. 10 that the party ``doesn't automatically negate'' the possibility of choosing Muto and it wants to hold a public hearing of candidates.
``Any signs that the DPJ may accept Mr. Muto's nomination means a lot,'' said Akio Makabe, a professor of economics at Shinshu University in Nagano, central Japan.
The Democrats' election win boosted the chances for Kazuo Ueda, a Tokyo University professor who sat on the bank's policy board for seven years through 2005. Six analysts surveyed said Ueda, 55, is now the most likely candidate.
In response to a question asking economists to list three potential nominees, Ueda was mentioned 14 times and Muto 12.
Ueda's Dissent
Ueda dissented when the central bank raised rates from near zero in August 2000, judging that the economy was too weak to withstand tighter credit. The bank cut borrowing costs seven months later as the global economy faltered. He told the Nikkei newspaper in May that Japan has yet to beat deflation.
``The pace of Japan's interest-rate hikes would probably slow if Mr. Ueda becomes governor,'' RBS's Yamazaki said. ``Investors would adjust their outlook for rates accordingly.''
The central bank last week kept the key overnight lending rate at 0.5 percent, the lowest among major economies, after global financial-market turmoil clouded Japan's growth prospects.
Fukui told reporters after the decision that keeping borrowing costs too low may spur risky investments. The bank will make an appropriate judgment by examining ensuing data and market movements, he said. The bank raised rates for the first time in almost six years in July 2006 and again in February.
Investors see a 36 percent chance policy makers will raise the key rate at the Sept. 18-19 board meeting, according to Credit Suisse Group calculations based on interest payments.
Less Willing
The ruling Liberal Democratic Party's election rout may make the government less willing to comment on the bank's policy, economists said. Prime Minister Shinzo Abe is expected to announce a Cabinet reshuffle today.
LDP Secretary General Hidenao Nakagawa, a critic of Fukui's pursuit of higher interest rates, last month said he would resign to assume responsibility for the election defeat. The government should study the effect of the two rate increases on economic growth, he said last week.
``The DPJ's advance may make it easier for the Bank of Japan to go ahead with policy it considers to be appropriate,'' said Teizo Taya, a former central bank board member and now adviser to the Daiwa Institute of Research in Tokyo.
Others the economists mentioned as potential candidates included Muto's fellow deputy Kazumasa Iwata, former deputy Yutaka Yamaguchi, ex-board member Nobuyuki Nakahara and former executive director Minoru Masubushi.
Those listed from outside the bank included Eisuke Sakakibara, a former vice finance minister for international affairs, Hiroshi Okuda, former chairman of Toyota Motor Corp., and Hiroshi Yoshikawa, a Tokyo University professor.
