The Bank of Japan could buy bonds more aggressively if the government commits to lowering the world’s largest public debt, said Nobuo Inaba, a former central bank official and a possible candidate to replace Governor Masaaki Shirakawa in April.
“The bank is concerned that continued massive bond purchases will lead to a worsening of the nation’s fiscal position,” Inaba said in an interview with Bloomberg on Nov. 16. “The bank could strengthen its easing and increase the impact of its policies” if the government commits to achieving fiscal health.
The yen weakened to a near seven-month low today as markets expect mounting political pressure on the BOJ to lead to further monetary stimulus. The opposition Liberal Democratic Party, leading in polls to win an election next month, has called for “unlimited” easing to end deflation and revive an economy that shrank last quarter at the fastest pace since 2011’s earthquake.
Inaba, who was the BOJ’s executive director, said that the bank’s Oct. 30 joint statement with the government on ending deflation, the first of its kind, was “meaningless” without a firm government pledge to lower the nation’s debt, which stands at 237 percent of gross domestic product, according to the International Monetary Fund.
“The government should make a legal promise to maintain fiscal consolidation in the midterm,” said Inaba, 62, who is currently head of the Ricoh Institute of Sustainability and Business, a think tank.
LDP leader Shinzo Abe last week called for the BOJ to pursue an inflation target of up to 3 percent and said he would revise the law governing the BOJ’s independence. Kyodo News yesterday cited Abe as saying he may ask the BOJ to buy construction bonds to support spending and would prefer the next BOJ governor to be someone who is in favor of inflation targets.
“Abe has been making various comments, but what the central bank can do depends on how seriously the government can manage itself to restore fiscal health,” said Inaba, who helped draft the BOJ law as a central bank official in 1998. While improvements can be made, “the BOJ law shouldn’t be altered due to the policy of one administration or some lawmakers,” he said.
The yen was at 81.27 per dollar at 10:52 a.m. in Tokyo, after earlier weakening to 81.59, the lowest since April 25, as the market continues to price in more easing. Japan’s Topix Index closed the morning session up 1.4 percent, heading for the biggest three-day gain since March 2011 as the weakening yen improves the outlook for exporters.
Twenty-five percent of respondents in the Nikkei Newspaper poll released today said they favor the LDP, while 16 percent chose the ruling Democratic Party of Japan, before elections on Dec. 16.
All 22 economists surveyed by Bloomberg News expect the BOJ policy board to take no new action at a two-day meeting through tomorrow. Sixteen economists forecast easing at the next meeting in December.
At its last meeting on Oct. 30, the BOJ added to monetary stimulus for the fourth time this year. It increased asset purchases by 11 trillion yen ($135 billion), announced a new unlimited lending program and released the joint statement with the government.
The BOJ has so far pledged to buy 39 trillion yen in government debt before 2014, close to the 44 trillion yen of new bonds to be issued this fiscal year. Japan’s debt rose to 983.3 trillion yen at the end of September, the Finance Ministry said on Nov. 9.
Kazuhiko Ogata, chief economist at Credit Agricole SA, said that Inaba is a potential candidate to become head of the BOJ when Shirakawa’s five-year terms ends on April 8.