Bank of Japan faces pressure to act to end deflation and spur growth
Political shake-up and pessimism among manufacturers fuel calls for more aggressive action to end deflation and spur growth
The Bank of Japan faces increased pressure to step up easing in coming weeks as political leadership changes and pessimism among manufacturers intensify calls for more aggressive action to end deflation and revive growth.
The bank's policymakers met yesterday for the first time since Seiji Maehara was named economy minister on Monday and Shinzo Abe became leader of the opposition Liberal Democratic Party.
Maehara is pushing the bank to consider buying foreign bonds and says he may attend policy meetings, while Abe wants an inflation rate of 3 per cent, up from the central bank's 1 per cent goal.
New Finance Minister Koriki Jojima said he wanted the central bank to implement monetary policy as "boldly as needed" and that the need for easing depended on the state of the economy.
The calls reflect mounting signs Japan's economy is in a contraction, the limited fiscal scope for politicians to boost growth and jockeying for support before elections. While the bank is projected to leave policy unchanged today after expanding its asset-purchase fund last month, the political shift underscores forecasts for further steps by the end of the year.
"It's a vicious circle," said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute in Tokyo and a former central bank official. "The BOJ is working hard to show its efforts to lawmakers, rather than deciding policies based on economic developments. Politicians find BOJ policies aren't helping the economy, and they get frustrated."
Kumano doesn't expect the BOJ to ease up at the end of the two-day meeting, saying the bank may act at the end of the month if the yen appreciated "significantly".
It is not only the political landscape that's changing. The central bank is due for a once-in-five-years leadership change early next year as the terms of governor Masaaki Shirakawa and his two deputy governors end, opening up the possibility of replacements who are more aggressive on easing.
Abe's "hard line against the BOJ" could result in the ruling party agreeing to name a "dove" for Shirakawa's role to secure parliamentary approval for the nomination, said Chotaro Morita, a strategist for Barclays.
Polls indicate that Abe's party may win an election that incumbent Yoshihiko Noda has pledged to call "soon". Public support for the LDP was up 11.1 points from a month earlier at 30.4 per cent, a Kyodo News poll showed this week. Support for Noda's ruling Democratic Party of Japan slipped to 12.3 per cent.
Minutes released this year of a bank meeting a decade ago show decision making is vulnerable to political pressure.
The February 2002 policy decision came after then finance minister Masajuro Shiokawa said he wanted the bank to increase monthly purchases of government bonds and former prime minister Junichiro Koizumi said he wanted "courageous monetary policy to defeat deflation".
The bank's then deputy governor Sakuya Fujiwara and former board member Miyako Suda said in the minutes they had accepted the government's request while not seeing much economic need.
"In theory, I think we don't need it but as a political judgment I can accept an increase of the monthly bond purchases by 200 billion yen as the government requested," Suda said. It was "very annoying" that government representatives should make such a proposal publicly, instead of at a policy meeting, she said.
Economic weakness is dragging on corporate earnings after output fell the most in three months in August.
Kobe Steel has cut its full-year operating profit forecast 40 per cent, citing a deceleration in the Chinese economy.
Sony Corp, Japan's biggest consumer electronics exporter, last month had its credit rating lowered by Standard & Poor's on concern over the company's earnings outlook.
Sustained strength in the nation's currency is hurting exporters. The yen was at 78.63 to the dollar yesterday afternoon, about 4 per cent from the postwar high of 75.35 reached last October.
Takehiko Nakao, the nation's top currency official, said this week that Japan's stance on intervening in the currency market was unchanged after the cabinet reshuffle.
"The yen's recent appreciation is one-sided and doesn't reflect the state of the Japanese economy," Jojima said. "We are ready to take bold action, and of course we will explain our view on this issue to the G7," he said, referring to a meeting of the Group of Seven nations in Tokyo next week.