TOKYO, Dec 18: The Bank of Japan will ease monetary policy this week and consider adopting a 2 percent inflation target no later than in January, sources say, responding to pressure from next Prime Minister Shinzo Abe for stronger efforts to beat deflation.
Abe’s Liberal Democratic Party (LDP) swept to power in Sunday’s lower house election after campaigning for big fiscal spending to revive the economy and ‘unlimited’ monetary easing to achieve higher inflation in a country mired in deflation for the past 15 years.
On Monday, he turned up the heat on the BOJ to boost its monetary stimulus when it ends a two-day meeting on Thursday and pressing it to adopt a 2 percent inflation target, double its current price goal, as soon as next month.
Under pressure, the central bank will likely ease policy this week amid looming risks to Japan’s economic outlook, sources familiar with its thinking have told Reuters, and may also start debating how to meet Abe’s calls to set a higher price target.
Abe will form a new cabinet on Dec. 26 and is seen choosing Taro Aso as finance minister, Japanese media said, a former prime minister and veteral lawmaker expected to toe the party’s line calling for aggressive easing and public works splurge.
That means the central bank will be under pressure to respond again at its policy-setting meeting on Jan. 21-22, when it is set to cut its economic forecast for the year ending in March 2013 due to the widening pain from slowing global growth.
‘Abe’s comments have really raised expectations for easing this week,’ said Norio Miyagawa, senior economist at Mizuho Securities Research & Consulting in Tokyo.
‘I think the BOJ will deliver with increased purchases of government debt. Next year could also be a big year for monetary policy easing, because of the inflation target debate and a change in leadership at the BOJ.’
BOJ Governor Masaaki Shirakawa, whose five-year tenure ends in April next year, was to meet Abe at the LDP headquarters in Tokyo on Tuesday.
The BOJ now sets a 1 percent inflation target but has said this is a goal for the time being, and that it considers a range of zero to 2 percent as long-term desirable price growth.
The central bank may thus opt to clarify that after the 1 percent inflation is met, it will aim for 2 percent inflation as a long-term policy goal, as a way to meet demands from Abe for more aggressive monetary stimulus.
The BOJ and the government may issue a joint statement, similar to one crafted in October between the central bank and the outgoing government led by the Democratic Party, pledging to take measures to aim for 2 percent inflatino in the long run, the sources said.
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The BOJ set a 1 percent inflation target in February and has eased monetary policy four times so far this year via an increase in its asset-buying and lending programme. But politicians like Abe have criticised the central bank for not doing enough to end 15 years of grinding deflation in Japan.
Some central bankers are keen to boost stimulus again, with the world’s third-largest economy already in mild recession and unlikely to rebound strongly early next year due to weak exports to China and the potential impact from the U.S. ‘fiscal cliff.’
Any BOJ action on Thursday will likely take the form of a further increase in its asset-buying programme. But central bankers, feeling the heat, have been privately pondering options for next year including setting a higher inflation target and buying government bonds more aggressively.
Throuch such steps, they hope to stave off threats by Abe of revising the BOJ law guaranteeing its independence.
But there is strong resistance within the BOJ on setting a 2 percent inflation target in a country that has barely seen price growth exceed 1 percent per annum in the past two decades. Japan’s core consumer inflation was flat in October from a year earlier after five straight months of declines.
BOJ officials, particularly those close to the conservative Governor Shirakawa, are wary of setting a higher price target without having effecive means of achieving it. They also fret that pumping too much money in an economy could brew seeds of imbalances, such as sharp rises in asset prices, in the long term horizon.
But Abe, whose LDP and its small ally New Komeito captured a two-thirds majority in Sunday’s landslide, has swiftly moved to press his agenda.
On Tuesday, Abe told reporters that he had agreed in a telephone call with U.S. President Barack Obama that the two would try to meet next month, part of a push to strengthen ties with Washington and give Japan a greater global security role.
The choice of Aso, 72, as finance minister suggests Abe is looking to LDP veterans to fill key posts to avoid criticism that his ministers lack experience, a recurring complaint about cabinets of the Democratic Party that trounced the LDP in 2009, only to suffer a crushing defeat three years later.
The new finance minister, along with the economic minister, can attend or send subordinates to BOJ policy-setting meetings. They cannot vote on policy decisions but can voice opinions and request a delay in a vote.
While Aso’s views on monetary policy are little known, as prime minister he launched massive stimulus packages to combat the 2008-2009 financial crisis.
But his efforts were overshadowed by gaffes, scandals and policy flip-flops that culminated with the LDP losing power after more than half a century of an almost non-stop rule.
(agencies)
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