BOJ refrains from stimulus despite political pressure

Bloomberg

The Bank of Japan held off from more easing after adding to stimulus last month, preserving its policy firepower despite increased political pressure and signs of an economic contraction.

The BOJ kept its asset-purchase fund, the main policy tool amid near-zero rates, at ¥55 trillion, the bank said in a statement Friday. The outcome was expected by all 20 economists surveyed by Bloomberg News.

Attention now turns to the next meeting on Oct. 30 as Morgan Stanley and Credit Suisse AG forecast two straight quarters of economic contraction through the yearend. Economic and fiscal policy minister Seiji Maehara attended Friday’s BOJ meeting, the first minister to do so in more than nine years, adding to pressure on BOJ Gov. Masaaki Shirakawa.

“The chances of more stimulus later this month are very high,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. and a former BOJ official. “Japan could fall into a recession and political pressure is going to increase as the country struggles to end deflation. The BOJ hasn’t got much room to breathe.”

BNP Paribas SA and Nomura Securities Co. also expect additional policy steps at the next meeting.

The BOJ kept its benchmark interest rate between zero and 0.1 percent and monthly bond purchases at ¥1.8 trillion. A fund that extends credit to banks was held at ¥25 trillion.

The bank downgraded its assessment of the economy for the second month, saying “economic activity is leveling off more or less.” Last month, the BOJ said “the pickup in economic activity has come to a pause.”

RBS’s Nishioka expects an expansion of the asset-purchase fund by ¥10 trillion on Oct. 30, when the bank could revise down its 0.7 percent inflation forecast for the year starting in April.

A Cabinet reshuffle and leadership contests for the ruling and main opposition parties since the BOJ’s last meeting in September have highlighted pressure on the bank, as politicians push for extra monetary steps.

Prime Minister Yoshihiko Noda last month pledged to defeat deflation within a year, while Shinzo Abe, the head of the opposition Liberal Democratic Party, said he wants an inflation rate of 3 percent, from the BOJ’s 1 percent goal now. Consumer prices excluding fresh food fell 0.3 percent in August, matching the steepest decline in 16 months.

Economists are split on whether Japan will suffer a contraction this quarter as some positive signs emerge in the U.S. economy. Barclays forecasts 0.7 percent annualized growth for Japan in the October-December period after an estimated 1.5 percent contraction last quarter.