BOJ Refrains From More Stimulus as Political Pressure Mounts

Japanese Economy Minister Seiji Maehara
Seiji Maehara, Japan's national strategy and economy minister. Photographer: Tomohiro Ohsumi/Bloomberg

The Bank of Japan held off from more easing after adding to stimulus last month, preserving its policy firepower despite increased political pressure and signs of an economic contraction.

The BOJ kept its asset-purchase fund, the main policy tool amid near-zero rates, at 55 trillion yen ($700 billion), the bank said in a statement in Tokyo today. The outcome was expected by all 20 economists surveyed by Bloomberg News.

Attention now turns to the next meeting on Oct. 30 as Morgan Stanley and Credit Suisse AG forecast two straight quarters of economic contraction through year-end. Economy Minister Seiji Maehara attended today’s policy meeting, the first minister to attend the meeting for over nine years, adding to pressure on BOJ Governor Masaaki Shirakawa, who today indicated the bank would lower its growth and price forecasts.

“There’s a chance that the BOJ will employ more monetary stimulus at its next meeting,” said Yoshimasa Maruyama, chief economist at Itochu Corp. in Tokyo. “The BOJ will likely revise down its CPI forecasts for fiscal 2012 and 2013,” at the meeting.

The Nikkei 225 Stock Average fell after the decision before recouping the losses and closing up 0.4 percent. The yen strengthened to 78.41 per dollar at 5:38 p.m from 78.46 before the decision.

Falling Prices

Japan’s central bank kept its benchmark interest rate between zero and 0.1 percent and monthly bond purchases at 1.8 trillion yen. A fund that extends credit to banks was held at 25 trillion yen.

“Downgrading the economy or growth rates means revising down the outlook for improvement in the supply-demand gap,” Shirakawa told reporters today in Tokyo after the meeting. “That qualitatively means downgrading consumer prices.”

The bank downgraded its assessment of the economy for the second month today, saying “economic activity is leveling off.” Last month, the bank said “the pick-up in economic activity has come to a pause.”

Junko Nishioka, RBS Securities Japan Ltd. chief economist and a former central bank official, expects an expansion of the asset-purchase fund by 10 trillion yen on Oct. 30, when the bank could revise down its 0.7% inflation forecast for the year starting in April.

Political Pressure

A cabinet reshuffle and leadership contests for the ruling and main opposition parties since the BOJ’s last meeting in September have highlighted pressure on the bank, as politicians push for extra monetary steps.

Economy Minister Maehara said after the meeting that he attended to express his “sense of crisis” about the yen’s appreciation and prolonged deflation, adding that he intends to go to future meetings as often as possible.

“Maehara’s attendance didn’t seem to have an impact on today’s meeting,” said Masaaki Kanno, chief economist at JPMorgan Securities Japan Co. and a former central bank official. “That doesn’t mean he won’t have an impact on policy in the coming months.”

Prime Minister Yoshihiko Noda last month pledged to defeat deflation within a year, while Shinzo Abe, the head of the opposition Liberal Democratic Party, said he wants an inflation rate of 3 percent, from the bank’s 1 percent goal now. Consumer prices excluding fresh food fell 0.3 percent in August, matching the steepest decline in 16 months.

Falling Exports

Exports are sinking, a boost from car-purchase subsidies is fading, and strength in the yen is hitting output. Large manufacturers became more pessimistic last quarter, a BOJ report showed Oct. 1, and relations with China, Japan’s biggest export market, are being tested by a territorial dispute.

Economists are split on whether Japan will suffer a contraction this quarter as some positive signs emerge in the U.S. economy. Barclays Plc forecasts 0.7 percent annualized growth for Japan in the October-December period after an estimated 1.5 percent contraction last quarter.

There are signs of weakness across the Asia Pacific region, with China yet to reverse its slowdown. The Asian Development Bank this week cut its growth forecast for the region excluding Japan to 6.1 percent this year, the slowest pace since 2009. The Reserve Bank of Australia cut interest rates for the first in four months on Oct. 2.

Japan’s recovery has been delayed by half a year, Shirakawa said after the BOJ expanded its asset-purchase fund by 10 trillion yen last month, six days after the Federal Reserve decided on the open-ended buying of $40 billion a month in mortgage debt.

Falling Profits

Sony Corp., Japan’s largest electronics exporter, cut its annual profit forecast 33 percent in August as the strong yen makes exports more expensive and reduces the value of repatriated earnings.

“More BOJ stimulus may help show the bank’s stance on preventing the yen from appreciating, but it won’t boost the economy much because liquidity isn’t a big problem in Japan,” said Shuichi Obata, senior economist at Nomura Securities in Tokyo. “Japan needs to wait for the global economy to revive.”

The central bank said in a separate statement that it will begin disbursing U.S. dollar loans this month as part of its efforts to spur growth. The BOJ delayed the program, which uses the 6-month U.S. dollar Libor rate, in August amid attempts to reform the London interbank offered rate.

The central bank also said in a statement today that it adjusted collateral prices for its policy programs “to maintain the soundness of its assets and efficiency, considering recent financial market developments.”

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