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BOJ, government in deflation test of wills

Open show of unity belies lack of mutual trust, reform pursuit

by Shinya Ajima

Kyodo

The rare joint statement Tuesday by the government and the Bank of Japan to showcase their alliance in fighting deflation meant to display unity, but it also highlighted the lack of trust in each other’s commitments.

The mutual suspicion, reinforced by decades of weak growth, appears to be one of the biggest obstacles they must overcome to ensure effective structural reforms and monetary easing that would help the economy return to a sustainable growth path with stable prices.

“It is significant that the government and the BOJ confirmed they will make every effort to beat deflation as soon as possible,” economic and fiscal policy minister Seiji Maehara said at a news conference after he attended a BOJ policy meeting in which the central bank decided to further ease monetary policy to boost the economy.

The view was shared by BOJ Gov. Masaaki Shirakawa, who separately told reporters the statement on “shared awareness” is aimed at “making clear the roles that (the government and the BOJ) should fulfill, respectively.”

The agreement is positive for both sides. For the government, the pledge by the BOJ in the written statement could help it rebuff criticism that it has failed to win sufficient cooperation from the bank, which often shows reluctance to respond to political pressure.

Maehara, a former policy chief of Prime Minister Yoshihiko Noda’s Democratic Party of Japan, has increasingly intervened verbally in BOJ affairs.

The accord “seemingly saved face for Mr. Maehara,” said Hideo Kumano, chief economist at Dai-ichi Life Research Institute. “Under the agreement, the BOJ is likely to build a more solid relationship with the government to beat deflation.”

For the BOJ, which has argued that an exit from deflation would require structural reforms in the economy, its written commitment will help it make a public case that the bank is encouraging lawmakers to act decisively in stimulating growth.

The joint statement said the BOJ will report the outlook for prices at a meeting of economic ministers, with the bank aiming to achieve 1 percent inflation with “powerful” monetary easing, and that the government will seek to reform “the economic structure predisposed to deflation.”

Making a promise on their collaboration doesn’t guarantee that the government and the BOJ can turn around the current situation completely, however, as the economy is suffering the effects of the declining birthrate and aging population, which have swelled welfare spending by the government and damaged the nation’s fiscal health, already the worst among major developed countries.

Decelerating reconstruction following the March 2011 earthquake and tsunami and slowing overseas economies are widely feared to lead to a contraction in gross domestic product in the third and fourth quarter.

The government drew up economic stimulus measures last week while the BOJ eased monetary policy Tuesday for the second straight month, expanding the asset-purchase program to around ¥91 trillion from ¥80 trillion to inject more liquidity into the financial system.

In any case, Japan is hardly out of the woods as long as deflation persists. The BOJ said it will not achieve the inflation goal at least through fiscal 2014, which ends in March 2015.

In its semiannual outlook report, the bank still insisted that the year-on-year rate of change in the consumer price index will likely “move steadily closer toward” the goal of 1 percent in fiscal 2014.

But two of the nine members at the BOJ Policy Board opposed the wording, Shirakawa said. The report forecast 0.8 percent CPI growth in fiscal 2014, while projections by the nine policymakers ranged from a rise of 0.2 percent to 1.0 percent.

With the government strongly demanding the BOJ meet the self-imposed inflation goal in the joint statement, a prolonged failure by the bank in achieving it could strain their relationship.

The government apparently hopes to avoid such a situation with the accord.