With his nation's economy contracting under disaster damage of as much as ¥25 trillion ($310 billion), Bank of Japan Gov. Masaaki Shirakawa is signaling that his biggest worry is inflation.
At stake for the student of Milton Friedman is protecting the bank's independence from financing public spending, as urged by lawmakers after the record March 11 earthquake. Shirakawa, 61, instead oversaw a ¥40 trillion boost in short-term funds, eschewing the scale of longer-dated asset purchases the Federal Reserve mounted after confidence in credit markets collapsed and the U.S. entered its worst recession since the Great Depression.
His strategy, which won the plaudits of 17 of the 24 primary dealers in Japan's government bond market in a Bloomberg News survey, may not be enough as he warns of the danger of asset bubbles. The yen's climb to about 6 percent from a postwar high against the dollar risks undermining exporters' earnings.