The Federal Reserve’s decision to set a 2 percent inflation target last month had a ripple effect a continent away: Japanese lawmakers are invoking it as evidence that their own central bank comes up short.
“Japan is sending a message we are OK with deflation,” Yuichiro Uozumi, a member of the No. 2 opposition party, told Bank of Japan Governor Masaaki Shirakawa at a hearing two days ago in Tokyo. The BOJ defines price stability as about 1 percent. The Fed “set a clear goal and made a firm promise for its commitment to fulfill the goal,” Kozo Yamamoto, with the top opposition group, said at a Feb. 2 hearing with Shirakawa.
Underlying the criticism is a legacy of more than a decade of deflation -- declines in price levels that can damp growth by making debts harder to pay off -- and calls by minority groups of lawmakers for more stimulus in the wake of the March 11 earthquake. With the Fed signaling another round of asset purchases, political pressure on the BOJ may rise.
“The Fed’s action ignited frustration with the Bank of Japan,” said Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo. “The Fed is making it clearer that the BOJ haven’t tried hard enough to end deflation. They may need to ease more, depending on moves in the yen.”
Shirakawa and his colleagues acted three times last year to expand asset purchases by a total of 15 trillion yen ($194 billion), efforts that didn’t halt yen gains. Companies from Panasonic Corp. to Sharp Corp. blame the yen, which yesterday traded at 77.07 per dollar, 2.2 percent from the postwar high in October, for contributing to predictions of record losses.
The BOJ concludes its next policy meeting Feb. 14, a day after a government report forecast to show gross domestic product shrank at an annualized pace of 1.4 percent in the fourth quarter, according to the median estimate in a Bloomberg News survey of economists. BOJ Deputy Governor Hirohide Yamaguchi told reporters Feb. 2 that the bank wasn’t considering immediate action to respond to the yen’s recent strengthening.
Shirakawa has said the BOJ is the “front runner” in implementing monetary policy, and has provided ample liquidity and kept the banking system healthy.
Lawmakers have used another measure to judge success. Consumer prices excluding fresh food fell 0.1 percent in December from a year before, the third straight year of decline. The BOJ’s stated understanding of price stability is from above zero to 2 percent, centered on 1 percent. Prices haven’t risen at least 1 percent for any year since 1997.
BOJ policy makers have pledged to keep interest rates near zero unless they judge that “price stability is in sight.”
The Fed last month committed to keeping its target rate at exceptionally low levels at least through late 2014. Chairman Ben S. Bernanke said Jan. 25 the Fed recognizes “hardships” imposed by high unemployment and “is prepared to provide further monetary accommodation.”
Fed officials also unveiled a statement of longer-term policy goals, defining 2 percent as their target for consumer price increases. Like the BOJ, the Fed will review its stance annually.
The BOJ chief told lawmakers Feb. 6 that “in my sense, it’s FRB policies coming closer to the Bank of Japan,” referring to the Federal Reserve Board.
At the same time, the Fed and BOJ have signaled differences over the ability to control long-run rates of change in prices. Fed policy makers said last month that “the inflation rate over the longer run is primarily determined by monetary policy.”
By contrast, Shirakawa has for years indicated that the BOJ cannot achieve its inflation target on its own. He said at a business conference Jan. 29, 2010, that lack of demand was the “root cause of deflation” and there was no “magic wand” policy makers could wave to stamp out falling prices.
Prime Minister Yoshihiko Noda told Diet members last month that he expects the Bank of Japan to take “bold” actions to address the yen’s rise and fight deflation. Finance Minister Jun Azumi said in parliament Feb. 2 “we expect the BOJ to implement appropriate and timely policies when needed as the U.S. showed a strong stance to maintain its easing policies.”
“Japan won’t change unless it employs a modest inflation target policy” like the Fed did, said Yamamoto, who belongs to the Liberal Democratic Party. Uozumi, a member of the New Komeito Party, said the BOJ “should set a price stability target at 2 percent.”
Yosuke Isozaki, another LDP lawmaker, said to Shirakawa Feb. 6 that “Japan is the only country having two decades of deflation,” asking whether it was “time for you to take responsibility.”
“The BOJ will be under more political pressure once the U.S. reaches a firm recovery ground,” said Masamichi Adachi, senior economist at JPMorgan and Chase & Co. in Tokyo and a former BOJ official. “The Bank of Japan thinks it’s doing its best but their best may be seen as being at a much lower level than other central banks.”
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