Bank of Japan defies easing calls as political pressure heats up
The Bank of Japan kept monetary policy steady on Tuesday, standing its ground for now in the face of calls from the country’s likely next prime minister to pursue “unlimited” easing.
The leader of the main opposition, Shinzo Abe, has put the central bank at the centre of economic debate ahead of a Dec. 16 national election that surveys show his party would win, signalling his government would put the bank under much greater pressure to ease policy.
Abe has even suggested revising the Bank of Japan law, a step critics say is aimed at clipping the central bank’s independence and forcing it to print money to finance public debt that is already double the size of Japan’s economy.
But the central bank kept monetary policy steady after a two-day meeting on Tuesday, holding fire so it can size up the policies of a new government to be formed after the December vote for the powerful Lower House. Markets had expected the central bank to hold fire on any policy changes.
“The BOJ will pursue powerful monetary easing continuously by keeping interest rates virtually at zero and steadily increasing the amount outstanding of its asset-buying programme,” the central bank said in a statement, repeating a pledge to maintain ultra-loose monetary policy to achieve 1 per cent inflation.
While the BOJ is worried about signs of recession, it opted to spend more time scrutinising the impact of its September and October easing that brought the size of its asset buying and lending programme to 91 trillion yen (US$1 trillion)-- roughly equal to Japan’s annual state spending.
Markets will now look to see how BOJ Governor Masaaki Shirakawa responds to the increased political heat when he holds a media briefing later in the day.
Japan’s economy shrank 0.9 per cent in the September quarter and given headwinds to growth in the current quarter, is widely expected to have slipped into a recession.
The BOJ maintained its assessment that the economy is weakening somewhat but warned that the persistent overseas slowdown was weighing on exports, output and business spending.
It also offered a slightly bleaker view on the outlook, saying that the economy will “remain weak for the time being” before resuming a moderate recovery. In October, it had said economic growth will remain flat for the time being.
Abe, the leader of the Liberal Democratic Party (LDP), has called on the BOJ for bolder action, including “unlimited easing”, pushing rates to zero or below zero and directly underwriting bonds issued to fund public works spending.
The comments have pushed the yen to a near seven-month low against the dollar and raised expectations the BOJ may ease policy again at its next review on Dec. 19-20, just after the election.
The BOJ is unlikely to give in to some of the extreme demands, such as underwriting debt, but is weighing options beyond its asset-buying programme, having cut policy rates effectively to zero, sources say.
The BOJ set a 1 per cent inflation target in February and has eased policy four times so far this year. Abe has talked of setting an inflation target of 2 per cent or 3 per cent.
Despite the political pressure, the BOJ is caught in a dilemma. Bank notes in circulation are rising and the balance of deposits that commercial banks park with the BOJ is at a record high of 44 trillion yen as a result of its ultra-loose policy.
But bank lending rose a meagre 0.9 per cent in the year to October, a sign the extra cash has not prompted companies and households to borrow more for new spending.
Under the current law, the BOJ is free to set monetary policy. But the government nominates the governor, deputy governors and board members, which need parliament approval, giving it power to sway the direction of policy.
The LDP is expected to include in its campaign platform a pledge to seek deeper cooperation with the central bank to achieve 2 per cent inflation, which could include revising the BOJ law, the Nikkei reported on Tuesday.
Government pressure has frequently driven the central bank into easing policy, particularly when a rise in the yen raised calls for measures to ease the impact of the stronger currency on the export-reliant economy.
While Abe’s remarks have helped lift Tokyo share prices on expectations of bolder monetary stimulus, some analysts say his demands are unrealistic and they doubt whether he will stick to them once in power.
Many economists also warn that threatening central bank independence or forcing it to underwrite public debt could trigger an unwelcome spike in bond yields by raising doubts in markets about Japan’s ability to keep its fiscal house in order.
Prime Minister Yoshihiko Noda was quoted by Japanese media as saying that he was opposed to forcing the BOJ to underwrite public debt or revising the central bank law, as doing so would go against Japan’s fiscal reform efforts.