A Japanese ruling party panel discussed currency intervention and recommended on Thursday that the government ask the Bank of Japan to take monetary policy a step further to counter a rising yen, increasing pressure on the central bank to act before its regular meeting next month. The policy panel's recommendations are part of a proposed economic package that mostly extends or expands stimulus measures currently in place.
The cabinet will discuss the proposal on Friday. The government plans to outline stimulus plans by the end of the month, the Asahi newspaper said. Japanese policymakers have scrambled to talk down the yen, which rose to a 15-year high against the dollar this week, and have hinted at the possibility of intervening in the markets for the first time since 2004.
"The government is apparently counting on the BoJ's further easing to slow the yen's rise as it wants to avoid actually intervening in the currency market and causing friction with the United States, which wants a weaker dollar," said Seiji Adachi, senior economist at Deutsche Securities. "The BoJ may resignedly ease its policy further in the face of government pressure, but its steps are likely to have only a short-term impact."
The government will urge the BoJ to ease monetary policy further as part of a package of steps to stem the yen's rise and support the fragile economy, the Asahi newspaper reported on Thursday. The BoJ is considering easing monetary policy at its next rate review on September 6-7 or earlier, with the most likely option an expansion of its cheap fixed-rate loan programme for banks put in place in December, sources said.
Prime Minister Naoto Kan is mapping out a series of steps to spur growth, such as extending the deadline for subsidies on purchases of energy-efficient electronics, but the government's options are limited with public debt nearly twice the size of the economy.
The fate of any economic package could be complicated by a ruling Democratic Party leadership vote on September 14, in which powerbroker Ichiro Ozawa is challenging Kan. Ozawa wants to keep spending promises made before the lower house election that propelled the party to power last year and has blasted Kan for raising the possibility of a sales tax hike before a July upper house election.
The ruling bloc lost that poll, forcing it to seek opposition help in passing legislation. Japan's large debt burden and the potential for political instability are putting pressure on the BoJ to do its part to help the economy. Government officials have also strengthened their tone against the rising yen by indicating that they have not ruled out intervention, which has been enough to cause the yen to pull back from the 15-year high versus the dollar.
"There has been debate about currency intervention in the party's policy panel, and I reported that to cabinet ministers," Democratic Party policy chief Koichiro Gemba told reporters without elaborating. Some analysts say if the yen appreciates rapidly and shoots past 80 yen to the dollar, the central bank may hold an emergency meeting to decide further easing before the government package comes out.