A deadlock over who will steer Japan's monetary policy through a global credit crisis appeared likely yesterday to drag on, even as the prime minister warned against leaving a vacancy when the central bank chief's term ends next week.
The government's nominee to replace Bank of Japan Governor Toshihiko Fukui, due to retire on Wednesday, was vetoed this week by the opposition, raising the possibility of a policy vacuum at a time when concern is growing that the US economy is in recession and Japan could well get dragged down with it.
Those concerns were underscored by a broad-based fall in the dollar to a 12-year low against the yen and a slump in Tokyo share prices to their lowest levels since August 2005.
"I feel responsible for the current situation over the Bank of Japan leadership at a time when there are a lot of changes and worries about the global economy and markets," Prime Minister Yasuo Fukuda told a parliamentary committee yesterday.
"But given the situation, we need to decide a central bank governor as soon as possible."
The dollar hit a record low against a basket of currencies and fell back below 100 yen yesterday, and Tokyo's Nikkei share average fell 1.5 per cent in a vicious circle linked to the soaring Japanese currency.
In another sign of deepening political paralysis, the opposition Democratic Party, which has made no secret of wanting to force a snap election, said it would not pass budget-related tax measures before the end of the fiscal year on March 31.
Senior ruling and opposition party lawmakers agreed on Thursday to seek a breakthrough in the stalemate over successors to Mr Fukui and his two deputies, but it was uncertain whether the government would climb down and offer a new slate of candidates.
"The Prime Minister will give careful consideration to the matter on the premise that we will not create a vacuum," chief Cabinet secretary Nobutaka Machimura said yesterday.
"I expect concrete steps will have to wait until the start of next week," he told a news conference. Mr Machimura has said an alternative candidate was one option.
The opposition-controlled upper house has rejected the government's nominee for governor - current Deputy Governor Toshiro Muto - as well as one of two candidates for deputy.
The Democrats argue that Mr Muto, a former finance bureaucrat, would be unable to guarantee the BOJ's policy independence.
Democratic Party Secretary General Yukio Hatoyama said it was "hard to imagine" his party would approve Muto if he was nominated again just to avoid a vacancy.
"In that case, I am afraid we would have to reject the candidate. We will be doing so for the Japanese people."
Only former BOJ official Masaaki Shirakawa has been approved as deputy governor, raising the possibility that he could serve as temporary governor if the dispute drags on.
The ruling Liberal Democratic Party (LDP) has also suggested revising the BOJ law to let Fukui stay on temporarily.
Analysts say a stopgap governor might be unwilling to take critical, long-term decisions, but also say that Japan, with interest rates down at 0.5 per cent, has little room for manoeuvre in monetary policy whoever heads the BOJ.
"There's a lot of worry about whether Japan can really handle crisis management," said Koichi Ogawa, chief portfolio manager at Daiwa SB Investments. "In a practical sense, the BOJ governor doesn't really do that much, but symbolically it's important."
Some within the LDP-led ruling bloc are pressing Mr Fukuda to select a new candidate to replace Muto.
Others want the government to stand firm in what critics of both sides have called a game of chicken between opposition and ruling camps in which neither is scoring points with the public.
Mr Fukuda's popularity ratings have sagged on doubts about his leadership since the 71-year-old took office last September.