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Bond-Buying Surprise Seen Failing to Ensure Japan Price Goal

Masaaki Shirakawa, governor of the Bank of Japan, surprised most forecasters with this week’s easing. Photographer: Haruyoshi Yamaguchi/Bloomberg
Masaaki Shirakawa, governor of the Bank of Japan, surprised most forecasters with this week’s easing. Photographer: Haruyoshi Yamaguchi/Bloomberg

Feb. 17 (Bloomberg) -- The Bank of Japan’s plan to spend a further 10 trillion yen ($127 billion) buying bonds may be insufficient to cure the nation of deflation that’s lasted more than a decade.

Nineteen of 21 economists in a Bloomberg News survey say the current stimulus won’t achieve the central bank’s new goal of 1 percent inflation any time in the next two to three years. Sumitomo Mitsui Asset Management Co., a unit of Japan’s second-biggest bank by market value, advocates more than doubling the BOJ’s asset-purchase and bank-credit programs to 165 trillion yen from 65 trillion yen.

The skepticism, even after Governor Masaaki Shirakawa and his colleagues surprised most forecasters with this week’s easing, highlights the challenge of altering perceptions that the BOJ is less committed to fulfilling its price mandate than the Federal Reserve. Shirakawa last week heard lawmakers praise the Fed’s pledge to secure 2 percent inflation.

“It’s probably espousing a much more aggressive stance than before, but just having an aggressive stance doesn’t really help unless people think you are actually going to follow through,” said Naomi Fink, head of Japan strategy at Jefferies Japan Ltd. in Tokyo.

The BOJ said this week that it will pursue “powerful monetary easing,” including interest rates close to zero, until the goal of 1 percent year-on-year increases in the consumer price index are in sight. The last year prices increased that much was 1997. Only one of 13 surveyed economists predicted this week’s easing.

Yen Influence

In the separate survey on the likely effects of the move, six analysts said buying foreign bonds would also be a useful step, and help to weaken the yen, which rose in October to a post-World War II high of 75.35 per dollar. It traded at 79.11 at 10:30 a.m. in Tokyo.

“The BOJ probably aimed to weaken the yen as the U.S. and Japan compete in monetary policy to depreciate their own currencies,” said Teizo Taya, a former central bank board member who now advises the Daiwa Institute of Research in Tokyo.

The Fed said this week that “a few” of its policy-setting committee members judged that economic conditions could warrant buying additional assets “before long.” Chairman Ben S. Bernanke had flagged the possibility last month, even amid signs the American economy is accelerating.

Like the BOJ, the U.S. central bank has turned to buying securities as its main tool after lowering the benchmark rate to near zero. The Fed bought $2.3 trillion of bonds in two programs of so-called quantitative easing.

Bernanke Comparison

“Bernanke gives the impression that he’s taking every possible measure,” said Takehiro Sato, chief Japan economist at Morgan Stanley MUFG Securities Co. in Tokyo. “I doubt if the BOJ really wants to beat deflation as they look like they are taking action only to avoid political pressures.”

While Japanese Finance Minister Jun Azumi welcomed the BOJ’s move as “aggressive steps” to beat deflation, some lawmakers renewed their criticism. Kozo Yamamoto, of the Liberal Democratic Party, said the 1 percent inflation goal was “too low” and not a substantial change from existing policy. Takeshi Miyazaki, a ruling Democratic Party of Japan lawmaker, said the central bank’s approach seemed half-hearted and may give the impression that Japan tolerates a strong yen.

While Shirakawa was called to parliament five times in nine days this month to explain the BOJ’s stance, he later said the subsequent steps weren’t a result of political pressure.

Economy Shrinks

Japan’s economy, the world’s third-biggest, shrank an annualized 2.3 percent in the fourth quarter, more than analysts estimated, after growing 7 percent in the previous three months. Honda Motor Co., the nation’s No. 3 automaker; Toshiba Corp., its biggest chipmaker; and Fujitsu Ltd., the largest computer-services firm, lowered their earnings forecasts last month. Growth may bounce back this quarter on increased earthquake reconstruction work.

Falling prices can inhibit an economy’s expansion by discouraging purchases -- because the consumer knows products will be cheaper tomorrow -- and making debts harder to repay. The BOJ and the Fed have diverged on the role that monetary policy can play in guiding prices.

A “few” members of Shirakawa’s policy board said attention needed to be paid to the risk that consumers and companies “would have increased expectations that prices were unlikely to rise even in the medium to long term,” according to a record of the January policy meeting released in Tokyo today.

No ’Magic Wand’

“I don’t think monetary policy alone can overcome deflation, although we are aware that monetary policy plays a major role,” Shirakawa said at a press conference in Tokyo this week. In January, 2010, he said lack of demand was the “root cause of deflation” and there was no “magic wand” to eliminate falling prices.

In contrast, the Federal Open Market Committee said in a statement on Jan. 25 that “the inflation rate over the longer run is primarily determined by monetary policy.”

Deflation became entrenched in Japan after a burst property and real-estate bubble in the early 1990s saddled the financial system with non-performing loans that took years to resolve. The Nikkei 225 Stock Average remains down 76 percent since its 1989 peak. A shrinking population has added to the nation’s challenges.

Operation Shift

In the survey, 13 economists said monetary policy alone can’t beat deflation. Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. in Tokyo and a former Bank of Japan official, said consumer sentiment and a lack of investment as companies shift operations overseas are causes. Akio Makabe, an economics professor at Shinshu University in central Japan, said policies to revive the private sector are needed.

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 goal is for consumer prices to rise between above zero and 2 percent over the long term, with a 1 percent objective for the “time being.”

The unveiling of the new target came after Prime Minister Yoshihiko Noda told lawmakers last month that he expected the BOJ to take “bold” policy actions to address the yen’s rise and to fight deflation. Noda met with Shirakawa a day after the central bank’s statement.

“It seems to us that government thinking has been a strong influence behind the scenes” of the BOJ’s announcement, Naohiko Baba, chief Japan economist at Goldman Sachs Group Inc. in Tokyo, wrote in a note to clients.

To contact the reporters on this story: Toru Fujioka in Tokyo at; Masahiro Hidaka in Tokyo at

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

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