Under pressure BOJ delivers stimulus

POLITICAL PROMISES::Despite warnings that inflationary measures may be counter-productive, Japan’s next prime minister vowed to keep bold stimulus election promises

Reuters, TOKYO

Fri, Dec 21, 2012 - Page 15

The Bank of Japan (BOJ) delivered its third dose of monetary stimulus in four months yesterday in a prelude to more aggressive action next year, as it faces intensifying pressure from the country’s next leader for stronger efforts to beat deflation.

It also signaled setting a higher inflation target at its next meeting in January, when a new government will be in place ready to negotiate with the central bank.

Incoming Japanese prime minister Shinzo Abe, whose opposition Liberal Democratic Party (LDP) won Sunday’s election by a landslide margin, has put the central bank’s independence on the line by repeatedly calling for a binding 2 percent inflation target, double its current price goal.

Feeling the heat, the central bank expanded its asset-buying and lending program by ¥10 trillion (US$119 billion) to ¥101 trillion, a widely expected move that barely moved markets.

“Japan’s economy is weakening further and is expected to remain weak for the time being,” the central bank said, offering a gloomy assessment of the world’s third-largest economy currently enduring its fourth recession since 2000.

With the latest move, the BOJ has expanded asset purchases five times this year, the most frequent activity during a single year in a decade. The last time it eased so many times was in 2001, when Japan was battling a domestic banking crisis.

The BOJ now has a 1 percent inflation target in place, and defines a range of zero to 2 percent consumer inflation as a desirable level of long-term price growth.

The central bank said it would review that guideline next month. It will probably clarify that after 1 percent inflation is in sight it will aim to achieve 2 percent inflation.

The yen has fallen almost 9 percent against the US dollar since September, as Abe’s emergence as the likely next prime minister raised expectations of a more expansionary policy and further spending.

The US dollar briefly edged up to around ¥84.39 after the BOJ’s decision, but quickly slid back down as markets perceived its action as unsurprising.

While Abe’s prescription has had the desired market effect so far, pushing down the yen and driving the benchmark Nikkei stock average above 10,000 for the first time in more than eight months, analysts say pumping cash into the economy will only give it a temporary boost unless it is followed by efforts to lift Japan’s growth potential and contain runaway debt.

Speaking at an LDP meeting, Abe, who is set to take over as prime minister on Dec. 26, said that he received a phone call from BOJ Governor Masaaki Shirakawa earlier in the day informing him of the central bank’s monetary policy decision.

“I take it as that the BOJ is carrying out what we sought during the election step-by-step,” he said.

Shirakawa has consistently argued that setting a 2 percent inflation target would be counter-productive in a country that has not seen consumer inflation exceed 1 percent for most of the past two decades.

However, Abe made a rare, direct push for a higher inflation target when Shirakawa visited the LDP’s headquarters on Tuesday, saying that the central bank must pay heed to the fact that he won an election campaigning for bolder monetary stimulus.

Abe also said that once he forms a cabinet next week he will instruct his ministers to begin working with the BOJ on setting a shared inflation target.

The LDP and its coalition partner, the New Komeito Party, together won a two-thirds majority in the powerful lower house that would allow them to overrule parliament’s upper house in most matters, including on any bill to revise the law guaranteeing the central bank’s independence from government interference.

Abe, who plans to compile a large stimulus package to revive the economy, may use that threat to nudge the central bank into buying bonds more aggressively to finance the costs.

Shirakawa’s five-year term as BOJ governor ends in April next year.