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Japan Debt-Financing Concern Clouds BOJ’s Bond Buying: Economy

BOJ Members Signal Concern
A pedestrian walks past the Bank of Japan headquarters in Tokyo. Government fiscal burdens, such as Japan’s public debt of twice the nation’s gross domestic product, can increase pressure on central banks to sacrifice their independence and prop up state spending. Photographer: Kiyoshi Ota/Bloomberg

Some Bank of Japan board members are concerned that increased bond purchases by the central bank may be viewed as financing government deficit spending, minutes of last month’s meeting show.

They said it was important “to clearly recognize and explain to the public” that bond purchases are not “for the purpose of monetization,” the document on the BOJ website showed today. The planned purchase of about 40 trillion yen ($479 billion) of debt a year is a “large amount,” they said.

Government fiscal burdens, such as Japan’s public debt of twice the nation’s gross domestic product, can increase pressure on central banks to sacrifice their independence and prop up state spending. In the absence of fiscal austerity measures, last month’s expansion of bond buying could be seen as paving the way for monetization, JPMorgan Chase & Co. said previously in a report.

The BOJ is likely to “adjust the size of this asset-purchase programe very gradually and mildly” to avoid investors pricing in that risk, said Junko Nishioka, an economist at RBS Securities Japan Ltd. who has worked for the central bank.

Governor Masaaki Shirakawa and his board members expanded bond purchases by 10 trillion yen at the meeting and set an inflation goal of 1 percent “for the time being.” Shirakawa said Feb. 14 that the central bank will “never buy bonds to help finance” the government, and that to do so would erode trust in Japan’s debt.

Japan’s 10-year bond yields fell 2 basis points to 1.035 percent at 10:44 a.m. local time after rising to 1.06 percent yesterday, the highest since Dec. 5.

Singapore, Sri Lanka

Elsewhere in Asia, Singapore reported that exports surged in February, while Sri Lanka may say growth slowed last quarter. Indian Finance Minister Pranab Mukherjee will unveil the country’s annual budget today.

The European Union statistics office may say the euro zone’s trade surplus fell to 6 billion euros ($7.9 billion) in January from 7.5 billion euros in December, a survey of economists showed.

In the U.S., a Labor Department report may show the consumer price index rose 0.4 percent last month from January, while a separate report is forecast to show both industrial production and capacity utilization increased in February. Economists surveyed by Bloomberg predict the Thomson Reuters/ University of Michigan preliminary index of consumer sentiment for March will be higher than February’s reading.

Economic Rebound

In Japan, the yen’s weakening from a post World War II high in October is aiding the nation’s recovery from last year’s earthquake and tsunami and an economic contraction in the fourth quarter. The central bank held off from expanding asset purchases this month as it monitored improvements, with Ryuzo Miyao the sole dissenter.

With two new members due to be appointed to the nine-person board within weeks, political pressure may mount for the central bank to take bolder action to counter the decade-long deflation the constrains growth in the world’s third-biggest economy. Some lawmakers, including within the ruling Democratic Party of Japan, are urging a higher inflation target and more asset purchases.

In Japan, the risk from monetizing debt would be that “bond prices would not reflect real fiscal risks” and would be “artificially” cheap, said Naomi Hasegawa, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo. “If that’s the case, investors are likely to avoid purchasing such investments.”

She added: “I don’t think the BOJ is monetizing debt yet.”

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