Business

Saturday November 21, 2009

BoJ upgrades view on economy


TOKYO: The Bank of Japan (BoJ) upgraded its economic assessment yesterday, setting itself up for a confrontation with the government, which is growing more worried about deflation and the risk of another recession.

The Japanese government published a report that pronounced the economy officially in deflation for the first time since 2006, and a minister said he expected an “appropriate” policy response from the BoJ.

Having resisted government pressure to extend support for credit markets, BoJ, which held its policy rate at 0.1%, may soon find itself under pressure to buy more government bonds as rising yields threaten an economic recovery.

“I think the BoJ will increase purchases of long-term bonds while allowing measures targeted at corporate finance to expire in December,” said Tomohiko Katsu, deputy general manager of capital markets at Shinsei Bank. “From the outside, it may seem like the BoJ is responding to government pressure, but I think people inside the BoJ understand the situation very well.”

Finance Minister Hirohisa Fujii said yesterday that rises in bond yields could undermine government efforts to help small companies, flagging the same concern he and other government officials used as they pressed the central bank to extend its corporate debt buying beyond December.

“Monetary policy is absolutely vital. It is like the lifeblood of the economy, so I want the BoJ to respond appropriately,” Fujii told a news conference.

The BoJ kept interest rates near zero and said it would maintain very easy monetary conditions. It dropped a more specific pledge to keep interest rates at low levels for some time, a line it inserted into the statement when it announced it would scrap some support for credit markets last month.

While that line appeared to have been inserted to placate a worried government, the central bank’s decision to upgrade its assessment of the economy yesterday was likely to provoke a strong response.

“Recent price developments show that the Japanese economy is in a mild deflationary phase,” the government said in its report on the economy.

The report did not say how it wanted the central bank to tackle deflation. The Organisation for Economic Co-operation and Development (OECD) on Thursday urged the BoJ to keep interest rates low and buy more government bonds to help beat deflation.

Government officials have criticised the BoJ’s view that the economy is starting to pick up as too rosy, arguing that the country could return to recession as job losses rise.

The BoJ also said it remained on guard against any risks to economic growth, particularly when the effect of domestic tax breaks tapers off early next year.

Government representatives at the BoJ meeting may have called on the central bank to do more, as the government maps out more stimulus to support the economy.

Two government representatives attend BoJ policy meetings. They cannot vote but they can request delays in policy decisions.

The BoJ is reluctant to buy more government bonds, arguing that there is not much room left to increase its bond buying with the balance of its government debt holdings already near a self-imposed ceiling.

If government pressure were to heighten dramatically, however, it may consider buying more than the present 21.6 trillion yen (US$242.9bil) a year.

Investor concerns about Japan’s fiscal health helped widen the two-year/10-year yield spread to a 3½ year high of 121 basis points last week. Japan’s sovereign five-year credit default spread widened to around 77 basis points early last week, its highest since April. — Reuters

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