Further BOJ easing needed: IMF’s Shinohara

by Keiko Ujikane

Bloomberg

The Bank of Japan may need to provide further monetary stimulus if power shortages, supply chain disruptions and the nuclear crisis after the quake are prolonged, the International Monetary Fund’s No. 3 official said.

“The risks to the economic outlook are firmly to the downside,” Naoyuki Shinohara, deputy managing director at the IMF, said in an interview at his office in Washington on Wednesday. While the Bank of Japan has responded “very quickly and flexibly” to the quake, “it’s necessary for the central bank to continue to take flexible action.”

The Japanese economy may shrink 3 percent this quarter in the wake of the March 11 record temblor, before expanding in the second half, according to the median of 18 estimates in a Bloomberg News survey in the past week. BOJ Gov. Masaaki Shirakawa said this week the bank will take appropriate policy steps as needed, after boosting liquidity injections last month.

Shinohara, 58, said the central bank shouldn’t directly buy bonds from the government, a measure advocated by some ruling and opposition party politicians as a way to issue debt to fund disaster relief without increasing bonds in the market.

“The Japanese market has the ability to absorb additional bonds that may be sold to finance reconstruction efforts,” said Shinohara, who directed Japan’s currency policy as the vice finance minister of international affairs from July 2007 to July 2009. “There’s no need for the BOJ to take on the risk” of hurting its credibility, he said.

Government bond underwriting by the BOJ is forbidden by law except with the approval of the Diet. Shirakawa has said taking that step would hurt the market’s trust in the yen, and members Prime Minister Naoto Kan’s Cabinet have also said they would be opposed to the measure.

After the disaster in Tohoku, the central bank doubled to ¥10 trillion a fund to provide cash to markets by buying assets such as corporate debt and exchange-traded funds. Last week, it also unveiled a ¥1 trillion, one-year loan program to banks aimed at getting funds to companies hit by the quake and tsunami.

Shinohara said bond yields could rise if the government fails to offer a solid plan to reduce its debt in the medium-term. Benchmark 10-year Japanese government bond yields around 1.3 percent help finance a public debt burden about twice the size of the economy.

“For the time being, the Japanese market could absorb bonds that may be sold to finance reconstruction efforts,” Shinohara said. “But, the important thing is to map out a medium-term fiscal consolidation program once the total cost for reconstruction becomes clearer. If not, it’s obvious that it may affect bond yields eventually.”

The IMF cut on Monday the 2011 growth forecast for Japan to 1.4 percent from 1.6 percent. The projection for next year was raised to 2.1 percent from 1.8 percent.

“There’s very high amount of uncertainty surrounding Japan’s economy” in the aftermath of the quake, said Shinohara.

Last month’s magnitude-9 earthquake left more than 28,000 dead or missing, according to the National Police Agency. The government last month estimated the damage by the disaster may swell to as much as ¥25 trillion.

The quake and tsunami crippled the Fukushima No. 1 nuclear plant operated by Tokyo Electric Power Co., causing radiation leaks and power shortages in eastern Japan. Government officials this week raised the severity level of the accident to the same level as the 1986 Chernobyl disaster.

Kan plans to unveil what he says may be the first of multiple supplementary budgets this month.

The Bank of Japan may need to provide further monetary stimulus if power shortages, supply chain disruptions and the nuclear crisis after the quake are prolonged, the International Monetary Fund’s No. 3 official said.