Business

Wednesday November 25, 2009

Deflation row in Japan


Cabinet ministers say BOJ was asleep at the wheel

TOKYO: Japanese cabinet ministers increased pressure on the Bank of Japan (BOJ) yesterday to respond to deflation, with one saying that the central bank was asleep at the wheel.

The government last week declared the country had entered its second bout of deflation in less than a decade as a public battle brews between the administration and the BOJ over how to manage the economy.

Each says the other should play a greater role in battling deflation, which is forecast to dog the economy for several years, raising fears of another recession. Economists, however, say options are limited for both.

The government has criticised the BOJ for having too rosy a view on the economic outlook, and Japanese Banking Minister Shizuka Kamei, a strident critic of the central bank, kept up the attack yesterday.

Two men walking past the Bank of Japan building in Tokyo on Tuesday. — Reuters

“The situation is serious,” Kamei, leader of a small political party in the government coalition, said.

“The Bank of Japan is asleep at the wheel as usual,” he told reporters after a cabinet meeting. “Because the BOJ is independent, we can’t simply lash out and wake it up. In that context, the government’s role is very important.”

For the government’s part, having the worst public debt burden among industralised countries at about 170% of gross domestic product leaves it little leeway to splash out on stimulus to keep the economy growing.

The BOJ may face pressure to increase its purchases of government debt pumping more cash into the economy but economists say that may not do much to close a large gap between supply and demand that is weighing on consumer prices.

Two government representatives, one from the Cabinet Office and another from the Finance Ministry, attend BOJ policy meetings. They cannot vote but can request delays in policy decisions.

”Monetary policy is principally responsible for price trends,” Finance Minister Hirohisa Fujii told reporters after a cabinet meeting yesterday.

”Fiscal policy cannot be the main tool to make up for Japan’s lack of demand.” — Reuters

The government will maintain close contact with the BOJ, National Strategy Minister Naoto Kan, who is also deputy prime minister, told reporters.

”The new government is shifting spending to welfare from infrastructure, but that will take time to have an impact,” said Simon Wong, regional economist at Standard Chartered in Hong Kong.

”At some point the BOJ will have to increase its purchases of Japanese government bonds (JGBs), because if you have deflation on one hand and rising yields on the other, you will have rising real interest rates and that will hurt the recovery.”

The BOJ buys 21.6 trillion yen of JGBs each year and has been reluctant to increase purchases, arguing that its government debt holdings are already approaching its self imposed ceiling.

Japanese consumer price deflation probably moderated only slightly in October as weak domestic consumer demand offset the waning impact of a slide in oil prices, data on Friday is forecast to show. - Reuters


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