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Japan's Central Bank Is Pressed to Boost Money Supply

The Bank of Japan may lose its independence if it doesn’t crank up the money supply
Japan's Central Bank Is Pressed to Boost Money Supply
Photo illustration by 731; Samurai: Bridgeman Art Library(2); Architecture: Getty Images

Shinzo Abe and the Liberal Democratic Party swept back into power in mid-December by promising a high-octane mix of monetary and fiscal policies to pull Japan out of its two-decade run of economic misery. To get there, Prime Minister Abe is threatening a hostile takeover of the Bank of Japan, the nation’s central bank. The terms of surrender may go something like this: Unless the BOJ agrees to a 2 percent inflation target and expands its current government bond-buying operation, the ruling LDP might push a new central bank charter through the Japanese Diet. That charter would greatly diminish the BOJ’s independence to set monetary policy and allow the prime minister to sack its governor.

Central bankers the world over know what it’s like to feel the heat from political leaders in a bad economy. Republican presidential candidate and Texas Governor Rick Perry in 2011 called Federal Reserve Chairman Ben Bernanke’s ultra-loose monetary policies “treasonous.” What’s taking place in Tokyo right now is far more threatening than a verbal jab. Abe ran against BOJ Governor Masaaki Shirakawa’s economic record as much as he did against former Prime Minister Yoshihiko Noda. The tactic worked: Abe’s LDP-led coalition won a two-thirds majority in the Diet’s lower house. “The LDP’s landslide election victory gives it a virtually free hand in policy,” Robert Feldman, Morgan Stanley chief economist for Japan, wrote in a Dec. 17 note to clients. “The macro stance will shift to ‘print and spend.’ ”