Japan’s liquidity supply dropped last month for the first time in more than three years, fueling complaints from politicians that the central bank should do more to end deflation.
The monetary base fell 0.2 percent from a year earlier, after climbing 11.3 percent in the previous month, a Bank of Japan (BOJ) report showed yesterday. The average amount outstanding was ￥112.46 trillion (US$1.37 trillion).
Opposition to the nomination of BNP Paribas SA economist Ryutaro Kono to the central bank’s board has highlighted some lawmakers’ concern that the BOJ is not doing enough to spur growth in the world’s third-biggest economy.
BOJ Governor Masaaki Shirakawa and his officials have pledged “powerful easing” until 1 percent inflation is in sight.
“This raises the question of how serious the BOJ is about monetary easing,” said Yasuhide Yajima, chief economist at NLI Research Institute in Tokyo. “This may give a reason for politicians to put more pressure on the BOJ.”
The monetary base is the currency supplied by the BOJ and its total current-account balance, as well as banknotes and coins in circulation. It surged 16.9 percent in March last year and peaked the following month, after the BOJ poured a record amount of cash into the financial system to stabilize the economy after a record earthquake and tsunami.
‘A shrinking monetary base is equivalent to monetary tightening,” Yuji Shimanaka, chief economist at Mitsubishi UFJ Morgan Stanley Securities Co in Tokyo, said before the report was released.
‘They may fail to win trust for accommodative monetary policy operations and that could bring back a situation where we have deflation with a strong yen in the worst case scenario,” he added.
Annualized, the monetary base fell 6.7 percent last month, compared with three months ago, after it dropped 16.4 percent in February, indicating that it was shrinking even if last year’s money injections were taken into account, Shimanaka said, citing his own calculations.
BOJ Deputy Governor Hirohide Yamaguchi said on Monday the central bank was not targeting monetary base levels when a lawmaker asked why the amount shrank by more than ￥6 trillion from January to February.
Even with the recent declines, the supply of currency remains near the levels that existed when the BOJ conducted quantitative easing from March 2001 to March 2006.
‘This is very important,” said Yoichi Kaneko, a lawmaker in the ruling Democratic Party of Japan, told Yamaguchi in a parliamentary hearing.
This means that while promising a strong easing stance, “the BOJ has sapped money from the market,” he said.
Sentiment among Japan’s largest manufacturers failed to improve last month as executives predicted the yen would rebound against the US dollar, hurting exporters’ sales and profits, the BOJ’s quarterly Tankan index showed on Monday.
“Business conditions aren’t good enough to convince companies to be optimistic,” Yajima said. “There’s room for the BOJ to do more to ensure a recovery.”