Bloomberg News

Japan’s Ruling Party Splits on Central Bank Buying Foreign Bonds

August 02, 2012

Democratic Party of Japan Policy Chief Seiji Maehara

Seiji Maehara, Democratic party's policy research committee chairman. Photographer: Haruyoshi Yamaguchi/Bloomberg

Japan’s ruling party signaled a division over a proposal for the nation’s central bank to purchase foreign-currency bonds, a week before monetary policy makers gather to assess whether to apply more stimulus.

Democratic Party of Japan policy chief Seiji Maehara told reporters in Tokyo yesterday that it was “desirable” for the government and Bank of Japan (8301) to reach an agreement that allows the BOJ to buy foreign securities. Finance Minister Jun Azumi this week told lawmakers that purchases akin to intervention in the foreign-exchange market would be inappropriate for the central bank.

The comments indicate increasing debate over the proposal, months after former deputy BOJ governor Kazumasa Iwata advocated a 50 trillion yen ($639 billion) initiative to combat the yen’s gains through buying foreign debt. The Finance Ministry is in charge of currency intervention in Japan, and the BOJ has focused its stimulus on purchases of domestic government bonds.

“Political calls on the BOJ to help curb the yen’s strength are gaining momentum,” said Chotaro Morita, a fixed- income strategist at Barclays Plc in Tokyo. Finance ministry and BOJ officials oppose the bond proposal, suggesting the central bank will use other stimulus if it needs to respond to “mounting political pressure,” Morita said.

Takehiro Sato, formerly an economist at Morgan Stanley who joined the BOJ board last month, said July 24 that buying foreign bonds is one option for the central bank. Fellow newcomer to the board Takahide Kiuchi said the same day that the bank may need to consider “new forms of monetary easing.”

More Debate

“Global economic indicators from almost all key trading partner regions are pressuring Japan for more policy action,” Morgan Stanley economists in Japan led by Robert Feldman wrote in a research note this week. “Monetary debate has perked up, thanks to the new monetary policy committee members.”

The BOJ next gathers to set policy on Aug. 8-9.

The strength of the Japanese currency is adding to manufacturers’ woes. Sharp Corp. (6753) said yesterday that it will cut 5,000 jobs after widening its annual loss forecast as demand for televisions slumped. Sony Corp. and Panasonic Corp. (6752) are also planning to shed workers following record losses.

Iwata, currently president of think tank Japan Center for Economic Research, said in a Jan. 25 interview that even companies like Toyota Motor Corp. (7203), which has built up a tolerance to an appreciating currency over the years, have been “screaming” about the yen.

The yen traded at 78.24 per dollar as of 8:03 p.m. in Tokyo yesterday, up almost 7 percent since mid-March. The currency reached a postwar high of 75.35 in October and reached an 11- year high against the euro this month.

Japanese Bonds

One of the central bank’s key monetary-policy tools, an asset-purchase program, is encountering difficulties because the BOJ wants to buy more Japanese government bonds than holders of the securities are prepared to sell. The latest failure to meet its purchase targets was on Aug. 1.

“We want to proceed with asset purchases steadily and surely while examining whether yesterday’s failure to attract enough bids will continue or whether that’s something we can address by the creative management of the operation,” BOJ board member Yoshihisa Morimoto told reporters in Kanazawa yesterday.

To contact the reporter on this story: Takashi Hirokawa in Tokyo at thirokawa@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net


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