The Yomiuri Shimbun/Asia News Network
Thursday, Nov 01, 2012
JAPAN – Before taking additional monetary-easing steps for a second month in a row, the Bank of Japan apparently struggled to decide what specific steps to take amid intense pressure from the market and the government.
The central bank’s nine-member Policy Board decided to take the additional easing measures Tuesday. It also issued a joint statement with the government expressing their shared view that the biggest challenge for the economy is overcoming deflation as soon as possible.
In his blog updated Tuesday, Prime Minister Yoshihiko Noda welcomed the bank’s move, saying, “This will be yet another great step for the economy toward overcoming deflation early.”
Finance Minister Koriki Jojima also hailed the action, saying to reporters, “Monetary-easing measures even bolder than the previous ones have been taken by the central bank.”
However, the latest easing was not necessarily in line with a plan envisaged earlier by the central bank.
When the bank decided to increase its fund mainly for asset purchases by 10 trillion yen in September, Bank of Japan Gov. Masaaki Shirakawa said the move was “taken in anticipation of downward revisions in the outlook of the overall economy and commodity prices.”
A prevailing view within the bank had been that it should try to ascertain the effect of September’s monetary easing. But the situation changed drastically Oct. 17, when Noda instructed economic ministers to map out emergency economic measures.
In the financial market, speculation grew quickly that the central bank, in line with the government, would take additional monetary-easing measures worth 20 trillion yen–even bolder than the previous easing.
On Oct. 22, the central bank released its report on local economies, which highlighted the adverse effect on the economy wrought by the soured relations with China over the government’s purchase of three of the Senkaku Islands in Okinawa Prefecture from their private owner.
Following the report, calls for additional easing measures increased, even with the central bank. Masayoshi Amamiya, head of the bank’s Osaka branch, said, “There’s a danger of the [deteriorated] Japan-China relationship adversely affecting the economy for a protracted period.”
Seiji Maehara, state minister for economic and fiscal policy in the newly reshuffled Cabinet, had urged the central bank to take further steps–even unconventional measures including purchasing foreign bonds–to ensure the economy could overcome deflation before the planned consumption tax increase in April 2014.
According to government sources, Noda was well aware of the problems Maehara was pointing to. The Finance Ministry, which Noda trusts highly, had been working behind the scenes to coordinate the views of the government and the central bank.
However, even though both sides were in agreement over taking concerted action, views were divided within the central bank as to what steps the bank should take.
Under pressure from the government to take further easing steps, and taking into consideration the view of the major opposition Liberal Democratic Party–led by Shinzo Abe, who has been calling on the bank to take powerful easing steps–a senior bank official said the bank should increase the fund by more than 20 trillion yen in one shot.
At the same time, there were strong calls to limit the injection to 10 trillion yen to avoid excessive “dependency on the central bank” in overcoming deflation and putting the economy back on a sustainable growth path.
Facing increased pressure to act, and knowing that if the market deemed the measures inefficient the bank could be seen as taking a backward stance, the BOJ made its decision at the 11th hour with only a handful of options.
The bank concluded that its best possible choice was to increase its asset-purchase fund by 11 trillion yen, bringing it to a total of about 91 trillion yen, and to establish a loan-stimulating facility to boost lending by commercial banks.
The bank reportedly calculated that combining two measures alone, the monetary easing would be worth more than 20 trillion yen–a level the market had hoped for.
Effects of the central bank’s easing decision were still yet to be seen Tuesday, as the yen edged upward and the stock market fell overall.
At a gathering in central Tokyo on Tuesday evening, Abe strongly criticised the bank’s latest move.
“The yen moved upward instead,” Abe said. “Piecemeal easing like this is of no use.”
Have you calculated the economic costs with the dispute with China? Your economy depends greatly on exports to China and the ability to setup factories in China for low production costs, I do not think you have factored in everything? It even cost more than the entire islands you are after so I think it is a stupid move, my advice is to settle the dispute quickly and put everything behind, there is greater money to be made now things are starting to pick up, it will help you save more than half your budget if you can resolve things amicably.
– Contributed by Oogle.