The Bank of Japan made its strongest commitment yet to end two decades of stagnation, shifting to Federal Reserve-style open-ended asset purchases while disappointing investors by delaying the program until next year.
Governor Masaaki Shirakawa and six of nine board members voted for a 2 percent inflation target, to be achieved “at the earliest possible time” -- a pace not sustained in Japan since the early 1990s. While judging that the economy is “relatively weak,” and that consumer prices will be flat for the time being, the BOJ refrained from adding immediate stimulus.
With a planned 13 trillion yen a month ($145 billion) in extra securities buying on hold until January 2014, the yen rose and stocks fell. The currency has slid and shares climbed the past 10 straight weeks in anticipation of the BOJ joining Prime Minister Shinzo Abe’s administration in strengthening measures to lift the economy out of its third recession in five years.
“What disappoints me was we can see the BOJ’s hesitance to step up monetary stimulus,” said Takahiro Sekido, a strategist in Tokyo at Bank of Tokyo-Mitsubishi UFJ Ltd. who formerly worked at the Bank of Japan. “Abe will keep pressing the BOJ but today’s decisions indicate that Abe will probably wait for the next governor to make a significant shift in monetary policy.”
Shirakawa’s five-year term concludes in April, and that of his two deputies in March, giving the government that took office last month a chance to reshape the nation’s central bank. At briefings today, Shirakawa said the BOJ had preserved its “independence,” while Chief Cabinet Secretary Yoshihide Suga said the joint statement had diminished the need to revise the law governing the central bank.
Yoshimi Watanabe, leader of the minority Your Party in parliament, said a target that’s not legally binding is unacceptable and the BOJ law should be revised.
Central bank independence may come under increasing pressure, with the government likely to demand a “clearer time frame,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. and a former Japanese central bank official. “The BOJ wants to emphasize that it requires flexibility for its monetary policy.”
Currently, the bank buys securities such as government bonds and exchange-traded funds through a fund targeted to reach 76 trillion yen in assets in December 2013. The 13 trillion yen initiative unveiled today will include about 2 trillion in Japanese government bonds and about 10 trillion yen in treasury bills.
Incorporating the impact of maturing securities currently included in the bank’s asset-purchase fund, the program’s size will grow by about 10 trillion yen next year, “and is expected to be maintained thereafter,” according to today’s statement.
“I have strong expectations for the Bank of Japan to proceed with bold monetary policy in order to achieve its 2 percent inflation target at the earliest possible date,” Abe told reporters. “I would like the Bank of Japan to take responsibility for achieving this price target.”
The yen was up 1.1 percent at 88.67 per dollar as of 7:54 p.m. Tokyo time, trimming its drop since mid-November to about 8 percent. The exchange rate has soared in recent years as investors sought a haven from turmoil in the U.S. and Europe, undermining the competitiveness of exporters from Panasonic Corp. to Nissan Motor Co. The Nikkei 225 Stock Average retreated 0.4 percent, still leaving it up about 24 percent since Nov. 14.
Abe’s calls for unlimited BOJ easing during last year’s election campaign triggered a 10-week Nikkei rally, the longest winning streak since 1987. In the bond market, today’s announcement saw yields on five-year government securities reach 0.145 percent, the lowest level since June 2003.
A forecast released with today’s statement showed that the BOJ sees a gain in consumer prices of 0.9 percent for the fiscal year starting April 2014. The BOJ and the administration also published a joint statement today pledging to “strengthen their policy coordination.”
The statement said that “efforts by a wide range of entities” are needed. At a briefing, Finance Minister Taro Aso said that it’s difficult to set a clear deadline for 2 percent inflation and achieving the goal is not only up to the BOJ and the government.
In the U.S., the Fed doesn’t see things that way. U.S. central bank policy makers said last year that “the inflation rate over the longer run is primarily determined by monetary policy.”
By contrast, Shirakawa has for years indicated that the BOJ cannot achieve its inflation target on its own. He said at a business conference Jan. 29, 2010, that lack of demand was the “root cause of deflation” and there was no “magic wand” policy makers could wave to stamp out falling prices.
“The BOJ is moving into new territory,” said Masaaki Kanno, chief economist at JPMorgan Securities Japan Co., who had predicted the BOJ would move to open-ended asset purchases. “Two percent inflation will be hard to achieve any time soon, so the BOJ will keep pushing easy policy for quite a long time.”
Twenty-one of 23 economists surveyed by Bloomberg News forecast that the bank would set a 2 percent inflation target. The median estimate for easing was a 10 trillion-yen addition to the asset-purchase program. Two economists predicted a move to open-ended asset purchases.
Not all central bank board members were in favor of the 2 percent inflation target, with Takehiro Sato and Takahide Kiuchi voting against the measure, the BOJ said. They believe it’s too high and say they need to see a growth strategy first, Shirakawa told reporters. The introduction of open-ended purchases was a unanimous choice. The BOJ previously said it would ease until 1 percent inflation is “in sight.”
Abe’s drive for looser monetary policy and a weaker yen may increase tensions with trading partners. In a speech in Frankfurt yesterday, European Central Bank governing council member Jens Weidmann warned against “politicizing” the yen exchange rate and interfering in monetary policy. South Korea may suffer from a weaker yen as Japanese automotive and electronics exports become more competitive, Credit Suisse Group AG says.
Economy Minister Akira Amari told reporters that the government doesn’t intend to politically influence the exchange rate and that Abe will try to explain Japan’s policies to other nations.
Japan last had 2 percent annual inflation in 1997, when a sales tax was increased, with no sustained price gains of that size in two decades. Abe, whose Liberal Democratic Party won a landslide in the lower-house parliamentary election, backed the central bank when it raised interest rates in 2006, a move he now says was a mistake.
Bruce Kasman, New-York based chief economist at JPMorgan Chase & Co., says that Abe’s current campaign may be a shift as significant for Japan as Paul Volcker’s transformation of U.S. policy in the 1970s. Sharp Corp., which is facing back-to-back annual losses, said on Jan. 7 that a weaker yen would help to improve earnings. A steel industry lobby group said the same day that an ideal yen level is between 90 and 100 per dollar.
Former BOJ Deputy Governor Toshiro Muto, a possible contender to replace Shirakawa, said in an interview yesterday that no policies should be considered taboo in the fight against price falls. Another potential candidate to succeed Shirakawa is Asian Development Bank President Haruhiko Kuroda, according to JPMorgan’s Kanno. In 2002, Kuroda advocated a 3 percent inflation target.