Japan Seen Anteing Up on Stimulus as Yen Impact Fades: Economy

Nissan Motor Co. Chief Executive Officer Carlos Ghosn
Carlos Ghosn, Nissan Motor Co. chief executive officer, said that the currency is the unpredictable “one-thousand-pound gorilla” that is making all Japanese car manufacturers suffer. Photographer: Scott Eells/Bloomberg

Japan’s central bank is set to ante up on stimulus measures as a rebound in the yen shows that the impact of a 10 trillion yen ($123 billion) expansion in asset purchases in February is fading.

All 14 economists in a Bloomberg News survey predict additional easing when the Bank of Japan releases new inflation forecasts on April 27. Most expect an increase ranging from 5 trillion yen to 10 trillion yen.

One dynamic that may undermine stimulus efforts is Governor Masaaki Shirakawa’s own comments, repeated in the U.S. last week, that monetary policy has only a limited role in ending deflation and supporting growth. Former Bank of Japan board member Atsushi Mizuno says investors are confused on where the central bank stands, while JPMorgan Chase & Co. says failing to ease could see the yen strengthen further.

“The BOJ will have to clearly show powerful easing amid high market expecations and elevated political pressure,” said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute in Tokyo and a former official at the central bank. “Otherwise, investors will be more confused and the view will become more widespread that there is no change in the BOJ’s passive stance.”

The yen traded at 81.41 per dollar in Tokyo as of 10:24 a.m. in Tokyo today after sinking to an 11-month low of 84.18 on March 15. Yields for benchmark 10-year bonds fell to the lowest since October 2010 this week on easing speculation.

Unpredictable Gorilla

A stronger yen reduces export sales and profits, weighing on the nation’s recovery from last year’s tsunami, earthquake and nuclear crisis. Nissan Motor Co. Chief Executive Officer Carlos Ghosn said this week that the currency is the unpredictable “one-thousand-pound gorilla” that makes all Japanese car manufacturers suffer.

Eleven of the economists in the survey said they expect 5 or 10 trillion yen in extra asset-purchase money. Seven said the bank won’t extend the maturity of the bonds it buys beyond the current two-year maximum, while six disagreed.

JPMorgan said yesterday that the central bank may revise its forecast for so-called core inflation for the 2013 fiscal year to 0.6 percent from 0.5 percent, highlighting the case for more easing by showing the gap with the 1 percent price goal.

The BOJ should bolster its monthly purchases of government bonds by a fifth, double the inflation target, and commit to monetary easing through 2014, mirroring a U.S. pledge to keep interest rates near zero, former board member Nobuyuki Nakahara said yesterday. The central bank currently buys 1.8 trillion yen of government debt each month.

European Austerity

The Bank of Japan will meet as austerity measures in Europe curtail demand for Asian exports. In the U.K., a report today may show that the economy narrowly avoided returning to recession in the first three months, defying the warnings of some Bank of England policy makers.

Gross domestic product probably expanded 0.1 percent from the fourth quarter of 2011, when it shrank 0.3 percent, according to the median of 40 estimates in a Bloomberg News survey. A recession is defined as two straight quarters of contraction. The Office for National Statistics will publish the data at 9:30 a.m. local time in London.

In the U.S., a report from the Commerce Department will show a 1.7 percent decrease in March orders for durable goods, according to the median forecast in a Bloomberg survey.

Fiscal Plans

During his U.S. trip, Shirakawa spoke in New York and Washington. In one set of remarks, he said that Japan’s lack of “concrete reform plans” for the nation’s finances may be contributing to deflation and sluggish economic growth by discouraging spending by the public.

In another, he said that central banks “cannot reasonably deliver solutions to structural issues” and the key challenge for Japan is rapidly changing demographics.

“Considering that the Japanese financial conditions are probably the most expansionary among developed economies, the failure of Japan to shake off modest deflation can mostly be explained by its deteriorating growth potential,” the central banker said.

At the same time, expectations for monetary stimulus have risen since Shirakawa and his board members set the 1 percent inflation goal in February and pledged “powerful monetary easing” until that target is in sight.

Political pressure is elevated after the bank refrained from adding stimulus at the past two meetings and lawmakers blocked BNP Paribas SA economist Ryutaro Kono from joining the BOJ board because he was seen as insufficiently aggressive on easing, said economist Takehiro Sato.

‘Captive’ to Lawmakers

“Political pressure surrounding the BOJ is only intensifying,” said Sato, chief Japan economist at Morgan Stanley MUFG Securities Co. Lawmakers seem to be taking the bank “captive” and the result may be increased easing for years, the analyst said.

Japan faces the challenge of supporting growth without adding to the nation’s fiscal burden. Prime Minister Yoshihiko Noda is struggling to convince lawmakers to double a 5 percent sale tax to contain the world’s largest public debt burden, expected to exceed 1,000 trillion yen for the first time this fiscal year.

Yoichi Kaneko, a lawmaker at the ruling Democratic Party of Japan, said that while fiscal and monetary measures are both tools for reviving the economy, “we are going to squeeze spending,” leaving monetary policy as the only option.

Morgan Stanley MUFG said in a note yesterday that a policy deal “may be brewing” for Noda to offer alterations to the law governing the central bank in exchange for the opposition Liberal Democratic Party supporting a tax increase.

Striking a Deal

One possibility would be linking the tenure of BOJ leadership to progress in meeting an inflation goal, Morgan Stanley MUFG said. It didn’t cite sources for the speculation.

The LDP, the biggest opposition party, wants an agreement between the BOJ and the government for an inflation target of 2 percent, according to a policy outline released April 13.

Already, the central bank is “probably implementing policies it doesn’t want to,” according to former board member Mizuno, the managing director of Credit Suisse AG in Tokyo. The central bank “announced measures that it doesn’t necessarily think are effective” for ending deflation by expanding asset buys and setting the 1 percent inflation goal, he said in an interview on April 16.

Goldman Sachs Group Inc. economist Naohiko Baba previously said that those moves in February were “out of character” for Shirakawa, while JPMorgan described them as a “game changer” that marked a new approach by the monetary authority.

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