The Bank of Japan (8301) will need to slow monetary easing if the effects on prices and the yen go too far, said Koichi Hamada, who’s advising Prime Minister Shinzo Abe on choosing a new central bank chief.
Policy makers are “working hard to raise prices and influence the yen,” Hamada told reporters yesterday. “If it goes too far, it should be stopped,” he said after appearing with Economy Minister Akira Amari on an NHK television show in Tokyo.
Investors are gauging how far the government may let the Japanese currency slide after Abe’s pledges of aggressive fiscal and monetary action triggered a 10 percent decline against the dollar from mid-November. They got mixed signals last week, when Amari highlighted harmful effects of an excessive decline and then said he had been misinterpreted, while Hamada said 110 yen per dollar would be “too weak.”
“It will be difficult for the BOJ to slow its easing, but those concerns are still far away,” said Tomo Kinoshita, chief economist at Nomura Holdings Inc. in Tokyo. “They need to concentrate on getting out of deflation, and we can worry about inflation later.”
The yen advanced after touching a 2 1/2 year low, rising 0.6 percent to 89.59 at 1:45 p.m. in Tokyo as the Bank of Japan begins a two-day policy meeting. Technical indicators signaled recent losses in the currency may have been overdone. The Nikkei 225 Stock Average (NKY) was 0.9 percent lower after reaching a 32- month high on Jan. 18.
It “won’t be easy” to slow monetary easing when it becomes necessary, said Hamada, a retired Yale University economics professor who taught Bank of Japan Governor Masaaki Shirakawa at Tokyo University.
The government is trying to shake off entrenched deflation and drive a recovery in the world’s third-biggest economy. All 23 economists in a Bloomberg News survey expect the central bank to expand asset purchases at this week’s meeting, with a median estimate for a 10 trillion yen ($112 billion) increase. Abe already unveiled a similar size of fiscal stimulus.
Amari told reporters in Tokyo today that the government and BOJ are working on a joint statement on policy and that he is considering attending this week’s central bank meeting.
The Nikkei gained 1 percent last week, while the broader Topix Index capped its longest weekly winning streak since 1986 as the slide in the yen aided exporters.
“Abenomics has worked so far on the stock market and the yen just through announcements,” Hamada said.
Japan last had 2 percent annual inflation -- Abe’s new target -- in 1997, when Toyota Motor Corp. unveiled the Prius hybrid and the yen sank as low as 130 per dollar. Amari told reporters yesterday that a planned joint statement from the BOJ and the government won’t set a time period for the price goal and won’t call it a “long-term” objective.
“The BOJ will do what it has to do to reach a price stability target of 2 percent,” Amari said yesterday. “The government has a responsibility to do what it has to do to achieve growth and fiscal consolidation” to prevent a loss in confidence in the nation’s debt, he said, adding that “both sides are coming closer to agreement.”
Vice Finance Minister Shunichi Yamaguchi said last week Abe’s administration anticipates the BOJ will adopt the 2 percent inflation target. Finance Minister Taro Aso said Jan. 18 the bank and the government will issue a joint statement after the meeting.
Abe’s in the process of narrowing down a list of candidates to replace Shirakawa, whose term ends in April, Amari said, reiterating that “international communication skills” are a requirement.
Amari stoked a two-day gain in the yen last week after flagging the danger of the exchange rate getting too weak. He later said his comments had been misinterpreted, telling reporters that the yen is still correcting from excessive appreciation. Hamada said Jan. 18 that he wondered whether he should be advising Amari on the issue.
The nation’s currency policy risks fueling trade tensions. President Barack Obama should tell Japan’s new government that the U.S. will retaliate for policies aimed at weakening the yen, a group representing Ford Motor Co., General Motors Co. (GM:US) and Chrysler LLC said last week.
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