Japan Political Shifts Expose BOJ to Demands for Action: Economy
The Bank of Japan (8301) faces increased pressure to step up easing in coming weeks as political leadership changes and pessimism among manufacturers fuel calls for more aggressive action to end deflation and revive growth.
Governor Masaaki Shirakawa and fellow BOJ policy makers are meeting for the first time since Seiji Maehara was named economy minister Oct. 1 and Shinzo Abe became leader of the opposition Liberal Democratic Party. Maehara is pushing the BOJ to consider buying foreign bonds and said today he plans to tomorrow attend the second day of the BOJ’s meeting, the first minister to do so since 2003. Abe advocates “bold easing.”
The calls reflect mounting signs Japan’s economy is in a contraction, the limited fiscal scope for politicians to boost growth and jockeying for support ahead of elections. While the BOJ is projected to leave policy unchanged tomorrow after expanding its asset-purchase fund last month, the political shift underscores forecasts for further BOJ steps by year-end.
“It’s a vicious circle,” said Hideo Kumano, chief economist at Dai-Ichi Life Research Institute in Tokyo and a former central bank official. “The BOJ is working hard to show its efforts to lawmakers, rather than deciding policies based on economic developments. Politicians find BOJ policies aren’t helping the economy, and they get frustrated.”
Kumano doesn’t expect the BOJ to ease at this meeting, saying the bank may act at the end of the month if the yen appreciates “significantly.” Nomura Securities Co., RBS Securities Japan Ltd., and Citigroup Inc. are among those forecasting more stimulus by the end of October.
The Nikkei 225 Stock Average (NKY) is down about 14 percent from this year’s high in March, after gaining 0.9 percent today. Morgan Stanley and BNP Paribas expect Japan’s economy to shrink for two consecutive quarters through the end of December. Exports are sinking, a boost from car purchase subsidies is fading, and strength in the yen is hitting producers. Large manufacturers became more pessimistic last quarter, a BOJ report showed Oct. 1.
Readings on the global economy today will include U.S. data including jobless claims, factory orders and the Bloomberg Consumer Comfort Index, while the European Central Bank and Bank of England are due to announce policy decisions.
In Japan, Koriki Jojima, the newly installed finance minister, said yesterday that he wanted the central bank to implement monetary policy as “boldly as needed” and that the need for easing depends on the state of the economy.
It’s not only the political landscape that’s changing --the central bank is due for a once-in-five-years leadership change early next year as the terms of Shirakawa and his two deputy governors end, opening up the possibility of replacements who are more aggressive on easing.
Abe’s “hard line against the BOJ” could result in the ruling party agreeing to name a “dove” for Shirakawa’s role to secure parliamentary approval for the nomination, Chotaro Morita, a strategist for at Barclays Plc in Tokyo, said yesterday. Polls indicate that Abe’s party may win an election that incumbent Noda has pledged to call “soon.”
Public support for the LDP was up 11.1 percentage points from a month earlier at 30.4 percent, a Kyodo News poll showed this week. Support for Prime Minister Yoshihiko Noda’s ruling Democratic Party of Japan was down 0.6 of a percentage point to 12.3 percent.
Minutes released this year of a BOJ meeting a decade ago show decision making is vulnerable to political pressure. The February 2002 policy decision came after then Finance Minister Masajuro Shiokawa said he wanted the bank to increase monthly purchases of government bonds and former Prime Minister Junichiro Koizumi said he wanted “courageous monetary policy to defeat deflation.”
BOJ Deputy Governor Sakuya Fujiwara and board member Miyako Suda said they accepted the government’s request while not seeing much economic need.
“In theory, I think we don’t need it but as a political judgment I can accept an increase of the monthly bond purchases by 200 billion yen ($2.5 billion) as the government requested,” Suda said. It was “very annoying” that the government representatives should make such a proposal publicly, instead of at a monetary policy meeting, she said.
All 20 analysts surveyed by Bloomberg News expect the bank to keep its policy unchanged tomorrow. Naka Matsuzawa, chief strategist at Nomura Securities, said that the deterioration in economic conditions isn’t bad enough to justify back-to-back easing after the BOJ last month added 10 trillion yen to its asset-purchase plan.
Signaling frustration with the BOJ, incoming Economy Minister Maehara said Oct. 2 that his attendance at the policy meetings “is something that could happen” if he judges central bank actions to be insufficient. The BOJ says no minister has attended a policy meeting since April 2003. The opposition’s Abe, meanwhile, wants an inflation rate of 3 percent, up from the BOJ’s current 1 percent goal.
Noda pledged to defeat deflation within one year in his successful campaign to be re-elected as party leader last month. In a sign of the distance that policy makers must travel to meet that goal, prices excluding fresh food slid 0.3 in August, matching the steepest decline in 16 months.
“Law makers are desperate to achieve something before elections potentially in coming months,” said Shuichi Obata, senior economist at Nomura Securities in Tokyo. That means the BOJ is “very likely to be forced to ease again” as early as the end of this month.
Economic weakness is dragging on corporate earnings after output fell the most in three months in August. Kobe Steel Ltd. (5406) has cut its full-year operating profit forecast by 40 percent, citing a deceleration in the Chinese economy. Sony Corp. (6758), Japan’s biggest consumer electronics exporter, last month had its credit rating lowered by Standard & Poor’s on concern over the Tokyo-based company’s earnings outlook.
Sustained strength in the nation’s currency is hurting exporters. The yen was at 78.55 per dollar as of 5:37 p.m. in Tokyo, about 4 percent from the postwar high of 75.35 reached in October 2011.
Takehiko Nakao, the nation’s top currency official, said yesterday in an interview that Japan’s stance on intervening in the currency market is unchanged after the Cabinet reshuffle that saw Jojima appointed.
“The yen’s recent appreciation is one-sided and doesn’t reflect the state of the Japanese economy,” Jojima said in a separate interview. “We are ready to take bold action, and of course we will explain our view on this issue to the G-7,” he said, referring to a meeting of the Group of Seven nations in Tokyo next week.
Not everyone thinks that Japan should seek to contain the currency, with Eisuke Sakakibara, the former Ministry of Finance official known as Mr Yen, this week describing such efforts as pointless.
“Japan shouldn’t intervene,” Sakakibara said in an interview in Tokyo on Oct. 2. “The U.S. is against it, so it wouldn’t be effective. It’s not like 1995.”
The Bank of England is expected to keep benchmark interest rates and its asset purchase target unchanged at a meeting today, according to the median estimates of economists in Bloomberg News surveys. The European Central Bank will keep its key interest rate at a record low of 0.75 percent, another survey indicates.
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