Bloomberg News

BOJ in the Balance as Next Government Picks Top Posts: Economy

November 20, 2012

BOJ Governor Masaaki Shirakawa

Masaaki Shirakawa, governor of the Bank of Japan. Photographer: Kiyoshi Ota/Bloomberg

The government taking office after Japan’s Dec. 16 election will pick the central bank’s top three jobs, a chance to reshape policy in the third-largest economy that the opposition aims to seize for unlimited stimulus.

BOJ Governor Masaaki Shirakawa, criticized by politicians for his perceived failure to reverse more than a decade of deflation, ends a five-year term on April 8. His deputies Hirohide Yamaguchi and Kiyohiko Nishimura exit in March.

Shirakawa pushed back at a press briefing in Tokyo today, saying that he wants “respect for the BOJ’s independence” and that a 3 percent inflation target, advocated by opposition leader Shinzo Abe is “unrealistic.” Unrestrained money- printing would worsen the national debt, he said.

Abe, leading in polls before next month’s vote, helped drive the yen to a seven-month low yesterday by calling for unlimited easing and restrictions on central bank independence. An economy at risk of a second straight contraction this quarter may spur an Abe-led government to install a pro-easing majority at the BOJ, with two former private-sector economists on the nine-member board showing signs of favoring more stimulus.

“It looks like we’ll have a clear five majority votes for more BOJ action and that’s a change we haven’t seen in years,” said Kazuhiko Ogata, chief economist at Credit Agricole SA. (ACA) “BOJ policy will become more Bernanke-like in that it will be more aggressive and less focused on side-effects.”

Preserving Ammunition

Central bank policy makers refrained from easing today after a two-day meeting, as the government announced 1 trillion yen ($12 billion) of spending to support growth. The government will tap reserve funds from this fiscal year’s budget for the money to support growth, after announcing 750 billion yen of spending last month, Chief Cabinet Secretary Osamu Fujimura told reporters in Tokyo today.

The central bank in October added to monetary stimulus for the fourth time this year. All of 22 economists surveyed by Bloomberg News had forecast no change at today’s meeting. Sixteen economists see easing at the bank’s meeting on Dec. 19-20, only days after the election, while two more see action in January.

The yen rose as much as 0.3 percent to 81.14 per dollar following today’s decision, after touching 81.59 yesterday, its lowest since April 25 as Abe’s comments drove speculation on the prospects of more easing. The currency was trading at 81.23 at 5:37 p.m. in Tokyo.

Construction Bonds

Abe, the leader of the Liberal Democratic Party, last week called for the BOJ to pursue an inflation target of as much as 3 percent, compared with the bank’s current 1 percent goal. He said on Nov. 17 that he may ask the BOJ to buy construction bonds to support government spending and would choose someone in favor of inflation targets as Shirakawa’s successor, Kyodo News reported.

The LDP’s campaign platform for next month’s election will include a pledge to consider changing the law governing the BOJ, two party officials said on condition of anonymity.

“The pressure from Abe is at a level we haven’t seen for a while, if ever, but I doubt he can make the BOJ do everything he’s said,” said Shinichiro Kobayashi, a senior economist at Mitsubishi UFJ Research and Consulting Co. “Although it seems unavoidable that the BOJ will stay in an aggressive easing mode, global investors may be disappointed after Abe actually wins the election.”

Jojima’s Concerns

Finance Minister Koriki Jojima said today that direct underwriting of government construction bonds by the BOJ wouldn’t be appropriate and could lead to sharp inflation.

Tensions on the BOJ board emerged last month as Shirakawa said new members Takehiro Sato and Takahide Kiuchi, former economists at Morgan Stanley MUFG Securities Co. and Nomura Securities Co. who joined in July, objected to the wording of a policy statement saying the bank will pursue powerful monetary easing until it judges its inflation goal to be in sight.

Elsewhere in Asia, Chinese foreign direct investment fell for a fifth month in October. The Reserve Bank of Australia said more interest-rate reductions may be appropriate to spur growth as the nation’s mining boom wanes, according to minutes of its Nov. 6 policy meeting at which it held its key rate.

In the U.S., a Commerce Department report may show that housing starts fell in October after reaching a four-year high the previous month. Builders broke ground on 840,000 houses at an annual rate last month, down from 872,000 in September, according to the Bloomberg survey median.

Credit Suisse Group AG says the BOJ may switch next year to an “open-ended framework” in which it commits to buying around 2 trillion yen ($25 billion) in Japanese government bonds every month until inflation goes above one percent.

Asset Purchases

“If the BOJ alters the framework as we are expecting, 2 trillion yen in JGB purchases per month would last until around the end of 2018 or beyond,” Hiromichi Shirakawa, chief Japan economist at Credit Suisse and a former BOJ official, wrote in a research note last week. He is no relation to the BOJ governor.

The BOJ has so far pledged to buy 39 trillion yen in government debt before 2014 using its asset-purchase fund, close to the 44 trillion yen of new bonds to be issued this fiscal year. At its meeting on Oct. 30, the BOJ increased the size of the fund by 11 trillion yen.

Credit Agricole’s Ogata said that Toshiro Muto, Kazumasa Iwata and Heizo Takenaka are contenders to succeed Shirakawa as governor.

Muto, 69, a former central bank deputy governor and finance ministry official who now heads a think tank, was the government’s first choice for governor in 2008, only for his nomination to be rejected by upper house lawmakers who saw his ministry background as a threat to the bank’s independence.

Iwata, Muto

Iwata, 66, also a former BOJ deputy governor, leads the Japan Center for Economic Research and advises the Cabinet Office on economic policy.

“The government can benefit from having Muto at the top of the BOJ as he has links to the finance ministry and will likely move as the government wants,” Ogata said. “Iwata advises the current government and also speaks to the LDP, indicating he’s accepted by both parties, which is a huge advantage.”

Takenaka, 61, a former economic policy minister credited with formulating the policies that led to Japan’s longest postwar expansion, is an advocate of easing, Ogata says.

“This is a great opportunity for the government to instill its ideas in monetary policy,” said Koichi Haji, executive director at the NLI Research Institute in Tokyo, adding that, among the potential candidates, Iwata and Takenaka are the most in favor of more easing.

Fed’s Plan

In the U.S., Bernanke and the Fed are pressing on with record stimulus including a plan to buy $40 billion a month of mortgage-backed securities, aiming to spur growth and reduce unemployment. The Fed’s unorthodox policies show the struggle to strengthen the nation’s recovery, six years after home prices started a plunge that knocked the economy into the longest recession since the Great Depression.

Nobuo Inaba, a former executive director of the BOJ and another of Ogata’s picks as contender for BOJ governor, said in an interview with Bloomberg News on Nov. 16 that the central bank could be more aggressive in its monetary policy if the government commits to lowering the nation’s public debt, the largest in the world.

“The bank is concerned that continued massive bond purchases will lead to a worsening of the nation’s fiscal position,” he said.

To contact the reporter on this story: Toru Fujioka in Tokyo at tfujioka1@bloomberg.net

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


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