The Bank of Japan (8301)’s decision to hold off on fresh monetary stimulus for a year puts pressure on the Abe administration to revive growth through fiscal measures and risks capping losses in the yen that aid export competitiveness.
Governor Masaaki Shirakawa, whose term ends in less than 11 weeks, yesterday agreed to set the 2 percent inflation target urged by Prime Minister Shinzo Abe, while stopping short of immediate action to achieve it. The BOJ plans to start open- ended asset purchases in January next year.
Abe, elected last month on a platform calling for an end to two decades of deflation, hailed the BOJ commitment to consumer- price increases that would raise prospects for higher corporate revenues and tax receipts. His optimism in face of yesterday’s slump in stocks may reflect recognition that stronger measures must wait for a new BOJ chief.
“The decisions were disappointing but no one thinks this is over -- one of the reasons the BOJ did little today must be that they wanted to keep room for more action under the new governor,” Hiroshi Shiraishi, senior economist at BNP Paribas SA in Tokyo, said yesterday. For now, “with the BOJ moving gradually, the yen-weakening impetus from monetary-policy expectations may deflate,” said Shiraishi, who has analyzed the Japanese economy for about a decade.
The yen was little changed at 88.70 per dollar at 11:54 a.m. in Tokyo after it strengthened yesterday by the most since May. The Nikkei 225 Stock Average (NKY) was 0.8 percent lower at the break, falling for a third day after climbing for 10 weeks in anticipation of the BOJ joining Abe’s administration in strengthening measures to lift the economy.
In another sign of the challenges facing Abe, companies’ demand for credit declined in December from three months earlier, according to a survey of senior loan officers released by the BOJ today.
Japan’s efforts to sustain a recovery from the earthquake and tsunami of 2011 have been weighed down by weakness in exports, exacerbated by a territorial dispute with China and strength in the yen. The government needs to fuel growth without worsening a debt burden that the International Monetary Fund estimated at 237 percent of gross domestic product last year. The IMF forecasts the Japanese economy will grow 0.8 percent this year.
The government said last week it will add 10.3 trillion yen ($116 billion) in spending, which it predicts will increase gross domestic product by about 2 percentage points and create about 600,000 jobs. Citigroup Inc. estimates that 100,000 jobs will be created, while BNP Paribas forecasts 150,000.
Abe has a chance to reshape the nation’s central bank with the conclusion of Shirakawa’s five-year term in April and that of his two deputies in March. Shirakawa said the BOJ had preserved its “independence,” while Chief Cabinet Secretary Yoshihide Suga said a statement jointly released by the BOJ and government had diminished the need to revise the law governing the central bank.
The government should present its BOJ nominees in a package to parliament by the end of next month to allow time for the ruling Liberal Democratic Party to negotiate with opposition groups in the upper house, Masashi Waki, the LDP’s upper house parliamentary affairs chief, said in a Jan. 21 interview.
Among potential successors to Shirakawa is former Deputy Governor Toshiro Muto, who said in a Jan. 21 interview that no potential monetary measure should be considered “taboo,” and Asian Development Bank President Haruhiko Kuroda, a former head of currency affairs at Japan’s Finance Ministry, who in 2002 advocated “innovative” BOJ policies and a 3 percent inflation target.
Heizo Takenaka, the banking-crisis czar under former Prime Minister Junichiro Koizumi who criticized BOJ actions after the March 2011 earthquake, was hailed as a potential successor to Shirakawa this month by Your Party, a group whose votes in the upper house could help the government win confirmation for its nominee.
Former BOJ Deputy Governor Kazumasa Iwata has advocated a proposal for the bank to buy foreign bonds, an idea that the LDP said last year it would consider.
Abe may be biding his time until he can appoint a replacement who favors a deeper policy shift.
“Abe will replace him and his deputies with doves,” said Klaus Baader, chief Asia Pacific economist at Societe Generale SA in Hong Kong. “Abe was elected on a platform very much weighted toward the economy and won in a landslide.”
Shirakawa has for years indicated that the BOJ cannot achieve its inflation target on its own. He said at a business conference in 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.
“I have strong expectations for the Bank of Japan to proceed with bold monetary policy in order to achieve its 2 percent inflation target at the earliest possible date,” Abe said yesterday at a meeting of his fiscal policy council. “I would like the Bank of Japan to take responsibility for achieving this price target.”
Yesterday’s BOJ action, which follows the U.S. Federal Reserve’s expansion of bond purchases in December, puts a planned 13 trillion yen a month in extra securities buying on hold until next January.
In July, Abe will face elections for the upper house of parliament where the LDP lacks a majority.
“Abe needs to have the yen at least at the 95-100 level against the dollar and the Nikkei above 12,000 to gain strong support before the upper house election,” said Masamichi Adachi, senior economist at JPMorgan Securities in Tokyo and a former BOJ official.
Sharp Corp., which is facing back-to-back annual losses, said on Jan. 7 that a weaker yen would help to improve earnings. A steel industry lobby group said the same day that an ideal yen level is between 90 and 100 per dollar.
Currently, the central bank buys securities such as government bonds and exchange-traded funds through a fund targeted to reach 76 trillion yen in assets in December 2013. The 13 trillion yen initiative unveiled yesterday will include about 2 trillion yen in Japanese government bonds and about 10 trillion yen in treasury bills.
JPMorgan’s Adachi said he’s skeptical of what the BOJ can do. “It’s very difficult for the BOJ to achieve the 2 percent inflation target by 2015,” he said. “I call it Mission: Impossible.”
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