By Mayumi Otsuma
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Feb. 12 (Bloomberg) -- The Bank of Japan's next governor may have to reverse the policy pursued by Toshihiko Fukui and reduce interest rates.
The government will nominate a successor to Fukui, whose term ends next month, by mid-February, according to Chief Cabinet Secretary Nobutaka Machimura. Deputy Governor Toshiro Muto, 64, is the most likely heir, three surveys of economists by Bloomberg News since June have shown.
The bank will keep its benchmark rate at 0.5 percent on Feb. 15, analysts forecast, though some anticipate a cut later this year as higher energy and raw-material costs erode profits and slow growth. Fukui has contended since 2006 that the longest economic expansion in 60 years is spurring wages and spending, pushing prices higher and justifying gradual rate increases.
``We can't completely rule out the possibility of a rate reduction under a Muto-led central bank,'' said Ryutaro Kono, chief economist at BNP Paribas SA in Tokyo, one of 13 analysts out of 15 who predicted in December that Muto would get the job.
Prime Minister Yasuo Fukuda's government may propose Muto this week, the Yomiuri newspaper reported on Feb. 9. Machimura today said the report was ``false.'' Yasuhiro Sugimoto, a spokesman for the central bank, declined to comment.
Since the beginning of the year, reports show the outlook for Japan's economy has worsened.
Declining Wages, Sentiment
Wages fell at the fastest pace in more than three years in December and consumer sentiment sank to a four-year low as food and energy costs climbed. Companies plan to cut production in January and February, the first back-to-back drops since 2005.
The government, burdened by the world's largest debt, is reluctant to increase spending to spur growth. Investors see a 52 percent chance the Bank of Japan will lower rates by December, according to calculations by JPMorgan Chase & Co. using overnight index swaps.
``Given that there's little room left for Japan to extend fiscal measures, the only possible step to help the economy would be a rate cut,'' said Kono.
Muto, who has voted in line with Fukui since they assumed their posts at the bank in 2003, said on Jan. 10 that the world's second-largest economy will slow ``for the time being.''
The central bank will probably halve its key rate to 0.25 percent between April and June, said Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo.
Perception Gap
``There is a huge gap in perception between the bank and financial markets'' on the state of the economy, Sato said.
Even Fukui, 72, has indicated the bank may hold off on rate increases for now. Though he told finance ministers and central bankers from the Group of Seven nations meeting in Tokyo Feb. 9 that the cycle of higher profits feeding into wages and consumer spending is intact, he said the bank needs to examine how much higher prices are hurting economic growth.
The bank will keep its overnight lending rate unchanged at 0.5 percent, the lowest among industrialized nations, on Feb. 15, according to all 30 economists in a Bloomberg News survey.
Bank of Japan governors serve a five-year, non-renewable term. Fukui is the second chief since the central bank became independent from the finance ministry a decade ago.
Most of that time has been spent fighting deflation and recovering from the three recessions following the bursting of the stock- and property-market bubbles in the early 1990s. In 2006, Fukui ended the so-called zero interest-rate policy. The bank last increased its benchmark rate in February 2007.
Consumer Prices
Core consumer prices excluding fresh food, the bank's main inflation measure, doubled to 0.8 percent in December from a year earlier, the fastest increase in more than nine years.
Should Muto, a former top finance ministry official, be nominated, he will need approval by the opposition Democratic Party of Japan, which controls the Upper House. Some DPJ lawmakers have said they are opposed to appointing former ministry officials to top government jobs.
The government will also nominate candidates for the deputy governor positions to be vacated on March 19 by Muto and Kazumasa Iwata.
To contact the reporters on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net
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