The Bank of Japan may expand stimulus this month after lawmakers escalated pressure for extra action by blocking a candidate for the bank’s board and renewing calls for a more “proactive” monetary policy.
Morgan Stanley MUFG Securities Co., Mizuho Securities Co. and SMBC Nikko Securities Inc. predict that the BOJ will expand asset purchases at a meeting on April 27.
Parliament’s upper house yesterday rejected BNP Paribas SA economist Ryutaro Kono, described by Goldman Sachs Group Inc. as holding similar views to Governor Masaaki Shirakawa, who says that monetary policy alone cannot solve deflation. The central bank may stand pat at a two-day meeting ending April 10, preserving ammunition for later in the month, when price projections will show a goal of 1 percent inflation is not in sight, according to Morgan Stanley.
“The BOJ must be struggling to balance between responding to political requests and operating effective monetary policies,” said Akio Makabe, an economics professor at Shinshu University in central Japan.
Japanese stocks pared losses on the decision by the upper house, with the Nikkei 225 Stock Average still closing down 0.5 percent yesterday after falling demand for Spanish bonds refocused attention on Europe’s debt crisis. Japan’s currency traded at 82.27 per dollar as of 12:10 p.m. in Tokyo today and the Nikkei fell 0.7 percent, heading for its biggest weekly loss since August.
“It’s a shame that this didn’t get approved,” Japanese Chief Cabinet Secretary Osamu Fujimura said at a press conference in Tokyo yesterday. “This won’t cause problems for running the policy board immediately but this is not a desirable situation.”
Finance Minister Jun Azumi said today that BOJ candidates shouldn’t be chosen solely based on their support for monetary easing because it could hamper policy flexibility.
The world’s third-largest economy has contracted in three of the past four years and is struggling to recover from last year’s earthquake and tsunami and the yen’s gain to a postwar record against the dollar in October.
The BOJ’s Tankan survey this week showed large manufacturers’ confidence failed to improve in March and executives see the yen averaging 78.14 per dollar this fiscal year, a gain that would make exports less competitive. Akio Toyoda, the president of Toyota Motor Corp., said last month an “appropriate level” is 95 to 100.
“Proactive monetary policy is necessary to escape from deflation and end the strengthening yen,” Takeshi Miyazaki, a Democratic Party of Japan lawmaker and a leader of the ruling party’s anti-deflation group, said yesterday. “The main priority should be someone who is promoting monetary easing.”
Yesterday’s vote by the upper chamber, where the DPJ is in a minority, leaves the BOJ with two vacancies on a nine-person board and more changes are coming: the terms of two deputy governors end in March next year and Shirakawa’s tenure ends the following month. The Liberal Democratic Party, the largest of the opposition groups, objected to the nomination and is compiling a bill that would allow the government more influence over monetary policy.
“The extent of political pressure and market expectations will be a decisive factor” in the timing of the next easing, said Jun Ishii, chief fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities Co. “We can’t be optimistic as uncertainties including the strong yen and political disarray are mounting.”
Governor Shirakawa and his board members will review the bank’s current price outlook of 0.5 percent inflation for the fiscal year starting in April 2013 at the meeting on April 27. The central bank has pledged to continue “powerful easing” until a 1 percent inflation goal is in sight.
Shirakawa met with Prime Minister Yoshihiko Noda today for about an hour, the first meeting of the pair since Feb. 15, the BOJ’s press office said today. Fujimura said today the two pledged to remain in close contact.
The rejection of Kono, 47, “could add more pressure to the BOJ to do more,” Naohiko Baba, chief economist at Goldman Sachs in Tokyo, said this week. He said Kono’s views on monetary policy were “very close” to Shirakawa.
In a statement, Kono said that politicians are pushing monetary policies that are “divorced from reality.” He said a view that he was negative about an inflation target was a misunderstanding and added that a 2 percent goal may be suitable for Japan in the long term.
“Japan’s imminent issues are to reform the social security system and to achieve fiscal health and so I think raising taxes is inevitable” as those goals can’t be achieved through monetary policy, he said.
Elsewhere, employers in the U.S. probably added more than 200,000 workers to payrolls in March for a fourth straight month, according to the median estimate of economists surveyed by Bloomberg News. Bulgaria releases industrial production and retail trade for February and the Czech Republic will probably say industrial output rose 3 percent in February from a year earlier, according to an analyst survey.
Twelve of 13 economists surveyed by Bloomberg News said they expect the BOJ to keep benchmark rates in a range of zero and 0.1 percent and accommodative policies unchanged at the meeting next week. Credit Suisse Group AG’s Hiromichi Shirakawa, who accurately forecast easing in February and wrongly predicted another move in March, sees an asset purchase expansion of up to 5 trillion yen ($61 billion). In February, the addition was 10 trillion yen.
Japan’s politicians have a recent history of wrangling over central bank appointments, with the DPJ blocking appointments in 2008 and 2009 when the party was in opposition.
The opposition of some lawmakers to Kono being appointed may stem from “a toxic combination of party politics and a desire among some politicians to shift the blame for Japan’s problems onto the bank, ” Julian Jessop, a London-based analyst at Capital Economics Ltd., said this week.
Kono echoed Shirakawa last month in saying that central bank policy alone cannot solve structural economic problems. He warned of risks associated with “aggressive monetary policy” in a country with ballooning public debt, already twice the size of gross domestic product.
“I feel sorry for Kono as this wasn’t about his ability but is all about a political game,” said Adachi, of JPMorgan.
Kono was ranked the nation’s top economist in a survey of financial institutions this year by Nikkei Veritas, the weekly edition of Japan’s largest business newspaper.