Japanese Cabinet ministers increased pressure on the Bank of Japan (BOJ) yesterday to respond to deflation, with one saying that the central bank was asleep at the wheel.
The government last week declared the country had entered its second bout of deflation in less than a decade as a public battle brews between the administration and the BOJ over how to manage the economy.
Each says the other should play a greater role in battling deflation, which is forecast to dog the economy for several years, raising fears of another recession. Economists, however, say options are limited for both.
PHOTO: REUTERS
The government has accused the BOJ of having too rosy a view on the economic outlook, and Japanese banking minister Shizuka Kamei, a strident critic of the central bank, kept up the attack yesterday.
“The situation is serious,” said Kamei, leader of a small political party in the government coalition.
“The Bank of Japan is asleep at the wheel as usual,” he told reporters after a Cabinet meeting. “Because the BOJ is independent, we can’t simply lash out and wake it up. In that context, the government’s role is very important.”
For the government’s part, having the worst public debt burden among industrialized countries at about 170 percent of GDP leaves it little leeway to splash out on stimulus to keep the economy growing.
The BOJ may face pressure to increase its purchases of government debt — pumping more cash into the economy — but economists say that may not do much to close a large gap between supply and demand that is weighing on consumer prices.
Two government representatives, one from the Cabinet Office and another from the finance ministry, attend BOJ policy meetings. They cannot vote but can request delays in policy decisions.
“Monetary policy is principally responsible for price trends,” Finance Minister Hirohisa Fujii told reporters after a Cabinet meeting yesterday. “Fiscal policy cannot be the main tool to make up for Japan’s lack of demand.”
The government will maintain close contact with the BOJ, said National Strategy Minister Naoto Kan, who is also deputy prime minister.
The BOJ on Friday upgraded its assessment of the economy despite grumbling from the government, which on the same day declared Japan’s economy was experiencing mild deflation.
In the hope of diffusing some of the tension with the government, the BOJ renewed its pledge to maintain very easy monetary conditions by keeping its interest rates near zero.
Central bank Governor Masaaki Shirakawa said on Friday that falling demand was the root cause of deflation and that the BOJ would make sure consumer and corporate spending aren’t curtailed by monetary reasons, suggesting that fiscal spending must also play a role.
“The new government is shifting spending to welfare from infrastructure, but that will take time to have an impact,” said Simon Wong, regional economist at Standard Chartered in Hong Kong. “At some point the BOJ will have to increase its purchases of Japanese government bonds, because if you have deflation on one hand and rising yields on the other, you will have rising real interest rates and that will hurt the recovery.”
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