Under-pressure BOJ sets new target for inflation

‘EPOCH-MAKING’::Abe was more excited by the move than investors, with the Nikkei falling 0.35% after the market was disappointed that easing was delayed until next year


Wed, Jan 23, 2013 - Page 15

The Bank of Japan (BOJ) yesterday adopted a 2 percent inflation target and set out plans for indefinite monetary easing in a policy shift that Japan’s new prime minister hailed as “epoch making.”

The moves — set out in a rare joint statement with the government — followed stern calls from the country’s new administration led by Japanese Prime Minister Shinzo Abe for the central bank to become more aggressive in kickstarting the anemic economy.

“In terms of a bold review of monetary policy, this statement is epoch-making,” Abe told reporters in Tokyo.

Japanese Minister of State for Economic Revitalization Akira Amari echoed his boss, saying it was an “historic moment as the government and the Bank of Japan had never before expressed so clearly our commitments to achieve policy goals.”

However, investors were unimpressed with the broadly expected announcement, with the Nikkei stock index losing 0.35 percent by the close despite an initial surge, and the yen climbing against the US dollar and euro.

Asian markets were mixed yesterday, with Seoul gaining 0.49 percent, Sydney flat, Hong Kong moving 0.13 percent higher, Shanghai sliding 0.54 percent and Taipei rising 0.44 percent.

“The initial bullish market move was due to impulse buying, as the BOJ’s policy seemed on the surface to meet all the right expectations,” Mitsubishi UFJ Morgan Stanley Securities senior investment strategist Norihiro Fujito told Dow Jones Newswires.

However, Fujito said the announcement was “a fairly big disappointment” because the easing was put off until next year and there was no expansion in government bonds to be bought.

Societe Generale’s Hong Kong-based senior interest rate strategist Chong Wee-khoon (張偉勤) said the news was “pretty much in-line with expectations. There was not much of a surprise, as most of it was already well-telegraphed in advance.”

Japan’s new government, led by the hawkish Abe, swept to power last month on a pledge to fix the economy with big spending and to pressure the BOJ into aggressive action to kickstart the world’s third-largest economy.

Tensions have run high between BOJ policymakers and Abe’s administration, with the 58-year-old prime minister having openly said he would like to turf out BOJ Governor Masaaki Shirakawa, whose terms ends in April, and threatening to change a law mandating the bank’s independence if it does not fall into line.

Japanese Finance Minister Taro Aso has accused the bank of dragging its feet on tackling deflation.

The yen has been in a steep decline for weeks as markets bet the BOJ would inflate its ¥101 trillion (US$1.13 trillion) asset-buying program, its main policy tool.

“The Bank will introduce a method of purchasing a certain amount of financial assets every month without setting any termination date,” it said.

It was the first time in nearly a decade that the BOJ has announced an expansion of monetary policy in consecutive meetings.

The BOJ’s asset purchases usually come with a fixed expiry date, but the new program will see ¥13 trillion in monthly purchases “for some time” from its launch next year, it said.

The policy is similar to the US Federal Reserve’s unlimited monthly bond-buying program, known as quantitative easing, unveiled in September last year.

Also yesterday, the BOJ raised its economic growth forecast for the fiscal year to March next year to 2.3 percent, from a previous 1.6 percent estimate, and held interest rates at zero to 0.1 percent.

The BOJ said it changed its previous inflation “goal” to a more explicit “target” due to the “increasing awareness regarding the importance of flexibility in the conduct of monetary policy in Japan.”

However, the move was likely to be viewed as the BOJ falling into line with government demands, but it may still fall short of satisfying Japan’s prime minister.

Two members of the policy board voted against the new inflation target demanded by Abe, the bank said.

“The Bank of Japan at least offered a gesture to work together with the government to tackle deflation, mainly by adjusting its rhetoric,” Dai-ichi Life Research Institute chief economist Yoshikiyo Shimamine said.

However, “the government is likely to step up pressure on the BOJ and this will also be reflected in Abe’s nomination for a new bank governor,” Shimamine said.

On Monday, Germany’s central bank chief, Deutsche Bundesbank President Jens Weidmann, lashed out at what he called government meddling in the affairs of central banks in industrialized nations, such as Japan and Hungary.

“We are witnessing disturbing abuses ... where the new government is interfering massively in the affairs of the central bank, calling forcefully for a more aggressive monetary policy,” he said.