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IMF’s Shinohara Says BOJ May Need to Ease Further After Quake

Naoyuki Shinohara, deputy managing director of the International Monetary Fund. Photographer: Goh Seng Chong/Bloomberg
Naoyuki Shinohara, deputy managing director of the International Monetary Fund. Photographer: Goh Seng Chong/Bloomberg

April 14 (Bloomberg) -- The Bank of Japan may need to provide more monetary stimulus if power shortages, supply chain disruptions and the nuclear crisis after the quake are prolonged, the International Monetary Fund’s No. 3 official said.

“The risks to the economic outlook are firmly to the downside,” Naoyuki Shinohara, deputy managing director at the IMF, said in an interview at his office in Washington yesterday. The Bank of Japan needs to continue to take flexible action and more easing “may become necessary depending on the situation,” he said.

Japan’s economy may shrink 3 percent this quarter in the wake of the March 11 record temblor, before expanding in the second half, according to the median of 18 estimates in a Bloomberg News survey in the past week. BOJ Governor Masaaki Shirakawa said this week the bank will take appropriate policy steps as needed, after boosting liquidity injections last month.

Shinohara, 58, said the central bank shouldn’t directly buy bonds from the government, a measure advocated by some ruling and opposition party politicians as a way to issue debt to fund disaster relief without increasing bonds in the market.

“The Japanese market has the ability to absorb additional bonds that may be sold to finance reconstruction efforts,” said Shinohara, who directed Japan’s currency policy as the vice finance minister of international affairs from July 2007 to July 2009. “There’s no need for the BOJ to take on the risk” of hurting its credibility, he said.

BOJ Underwriting

Government bond underwriting by the BOJ is forbidden by law except with the approval of parliament. Shirakawa has said taking that step would hurt the market’s trust in the yen, and cabinet members in Prime Minister Naoto Kan’s government have also said they would be opposed to the measure.

After the disaster in northeastern Japan, the central bank doubled to 10 trillion yen ($120 billion) a fund to provide cash to markets by buying assets such as corporate debt and exchange-traded funds. Last week, it also unveiled a 1 trillion yen, one-year loan program to banks aimed at getting funds to companies hit by the quake and tsunami.

Shinohara said bond yields could rise if the Japanese government fails to offer a solid plan to reduce its debt in the medium-term. Benchmark 10-year Japanese government bond yields around 1.3 percent help finance a public debt burden about twice the size of the economy.

Bond Yields

“For the time being, the Japanese market could absorb bonds that may be sold to finance reconstruction efforts,” Shinohara said. “But, the important thing is to map out a medium-term fiscal consolidation program once the total cost for reconstruction becomes clearer. If not, it’s obvious that it may affect bond yields eventually.”

The IMF cut on April 11 the 2011 growth forecast for Japan to 1.4 percent from 1.6 percent. The projection for next year was raised to 2.1 percent from 1.8 percent.

“There’s very high amount of uncertainty surrounding Japan’s economy” in the aftermath of the quake, said Shinohara.

Last month’s magnitude-9 earthquake left more than 28,000 dead or missing, according to Japan’s National Police Agency. The government last month estimated the damage by the disaster may swell to as much as 25 trillion yen.

The quake and ensuing tsunami crippled the Fukushima Dai-Ichi nuclear plant operated by Tokyo Electric Power Co., causing radiation leaks and power shortages in eastern Japan. Government officials this week raised the severity level of the accident to the same level as the 1986 Chernobyl disaster.

Kan plans to unveil what he says may be the first of multiple supplementary budgets this month. Chief Cabinet Secretary Yukio Edano told reporters on April 7 that the first budget may be 4 trillion yen.

To contact the reporter on this story: Keiko Ujikane in Tokyo at

To contact the editor responsible for this story: Paul Panckhurst at

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