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BOJ Crosses Rubicon With Desperate Monetary Policy, Hirano Says

Bank of Japan Governor Masaaki Shirakawa
Masaaki Shirakawa, governor of the Bank of Japan. Photographer: Haruyoshi Yamaguchi/Bloomberg

The Bank of Japan’s decision to expand bond purchases and set a 1 percent inflation goal was a step too far that leaves the monetary authority likely to finance government deficit spending, a former executive said.

“They looked like really desperate measures,” Eiji Hirano, 61, who was a BOJ executive director in charge of international affairs from 2002 to 2006, said in an interview last week in Nagoya, central Japan.

The yen weakened and stock prices rose in the world’s third-largest economy after Governor Masaaki Shirakawa and his policy board unexpectedly pledged on Feb. 14 to buy 10 trillion yen ($121 billion) in government debt and set the inflation target. That market reaction creates the “illusion” that monetary policy alone can cure Japan’s economic woes and may compel the BOJ to bolster bond purchases further and monetize public debt, Hirano said.

“It looks like they have crossed the Rubicon,” said Hirano, who is now executive vice president at Toyota Financial Services Corp. That term means passing a point of no return and refers to Julius Caesar leading his army across the river in an act of war.

Japan’s benchmark Nikkei 225 Stock Average rose to the highest in a year and the yen fell to an 11-month low against the dollar after the February decision, buoying earnings prospects for exporters who last year faced a currency at a postwar high against the dollar. Easing concerns on Europe’s debt crisis and optimism about the U.S. economy have been factors in yen and stock moves, Hirano said.

Mired in Deflation

Japan’s output gap widened to minus 3.4 percent of gross domestic product in the three months to December, Cabinet Office data show, suggesting that supply still trumps demand in an economy that has been mired in deflation for more than a decade. It will take more than two years to eradicate the gap, according to Junko Nishioka, chief economist at RBS Securities Japan Ltd.

“It’s hard to imagine that the gap between supply and demand will be filled and prices climb close to 2 percent,” Hirano said. “Rather, a nightmare scenario is possible” in which increased pessimism on Japan lowers the value of the yen, stocks and bonds, he said.

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