Japan's government made some of its most pointed remarks to the Bank of Japan at its Oct. 30 policy meeting about the need for action to combat deflation, underlining the simmering row between the two over how best to handle the economy.
Government rhetoric has become sharper in recent weeks as it tries to prod the central bank to do more to act against falling prices, which some politicians fear could push the economy back into recession. Normally the two government representatives who attend BoJ rate reviews stick to the line the central bank should support the economy with monetary policy. They cannot vote on monetary policy but can voice opinions.
But the Ministry of Finance representative broke ranks on Oct. 30 by calling on the BoJ to clarify its stance on how it will tackle deflation, minutes of the meeting showed on Thursday. The government has been vague on what it wants the BoJ to do beyond keeping interest rates low. But analysts say the BoJ may eventually have to buy more government bonds, or return to a quantitative easing policy of flooding markets with extra cash.
"The pressure on the BoJ is set to increase, so quantitative easing is an option. But the effect on the economy will be limited," said Koichi Haji, chief economist at NLI Research Institute. At the Oct. 30 meeting, the BoJ decided to begin withdrawing from credit markets but extended a key loans programme, after government criticism over its moves to end corporate support put in place during the global financial crisis.
The BoJ has since raised its economic assessment, much to chagrin of the government which is considering looser policies to try to underpin a recovery, including an extra stimulus package. Another government representative at the Oct. 30 meeting proposed setting up a regular forum for talks between the government and the BoJ, but Governor Masaaki Shirakawa said only that the bank would continue to closely communicate with the government, the minutes showed.
"The conduct of monetary policy will ultimately be discussed and decided by the bank's policy board," Shirakawa, who chairs the board meetings, was quoted as saying. "But we would like to continue engaging in an appropriate exchange of views with the government."
Prime Minister Yukio Hatoyama's government is only two months old and is largely untested in fiscal policy. But it has adopted the kind of heavy-handed approach towards the BoJ that previous governments have used to influence monetary policy. In the latest sign of the government's sharpened rhetoric Banking Minister Shizuka Kamei this week said the BoJ was "asleep at the wheel."
The government and the central bank both argue the other should do more about deflation. The BoJ forecast three years of deflation in a twice-yearly economic outlook report issued after the Oct. 30 meeting, effectively pledging to keep interest rates near zero for as long as necessary to underpin the economy.
"I think both the BoJ and the government wonder whether there really is much more that can be done," said BNP Paribas Securities interest rate strategist Takafumi Yamawaki. "There is an increasing atmosphere where steps against deflation need to be taken on the BoJ's side, but the question is whether there are any effective measures."
While the government wants to stimulate the economy to avoid a second recession, it must also address growing investor and voter concerns about Japan's ballooning public debt, which at 170 percent of GDP is the highest among industrialised nations. Voter support for Hatoyama's cabinet is above 60 percent but slipping gradually. The nightmare scenario for the cabinet is an economic downturn ahead of an upper house election in mid-2010.
While the BoJ has said its cheap loans programme won't be extended again, one board member called for a flexible response and said the BoJ should not rule out keeping the programme in place, the minutes showed. All other members agreed with this view, the minutes showed. The two government representatives, one from the Cabinet Office and one from the finance ministry, can request a delay in a BoJ vote, although the BoJ can override such a request.
Comments
Comments are closed.