Bank of Japan Governor Masaaki Shirakawa urged reduction of the nation’s deficit to stabilize the yen as the bond market may come under pressure if investors lose trust in fiscal policy, the Asahi newspaper said.
The yen might become unstable, triggering uncontrollable inflation should the central bank buy government bonds in an attempt to prevent a financial crisis, Shirakawa said in an interview with the newspaper on May 11.
The BOJ is under pressure to add stimulus as a group of lawmakers proposed overhauling the BOJ’s governing law to ensure steps to end deflation afflicting the nation for more than a decade. The BOJ said its 1 percent inflation goal will be achieved before long after it expanded by 10 trillion yen ($125 billion) on April 27 its plan for government-bond purchases as the world’s third-largest economy showed signs of slowing. Prime Minister Yoshihiko Noda’s party sent a bill to parliament to double the sales tax by 2015 to rein in the world’s largest public debt over the objections of opposition lawmakers.
“Japanese government bonds would be sold if Japan’s fiscal policy was seen as unsustainable, causing heavy losses to financial institutions holding the bonds,” Shirakawa was quoted as saying.
Noda is struggling to convince lawmakers to double the 5 percent sales tax. Pressure will remain high as politicians want to show the public that the nation is making progress toward ending deflation, so a tax bump won’t be too much of burden, according to Masayuki Kichikawa, chief economist at Bank of America Merrill Lynch.
“The prices of Japanese government bonds are stable because investors see the nation has the will and ability to realize its fiscal adjustment,” Shirakawa said. “It is very important to improve fiscal policy while they retain trust.”
Japan’s economy rebounded last quarter after shrinking in 2011 with the impact from a record earthquake. Growth is forecast to moderate as a bump from reconstruction diminishes.
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