Liberal Democratic Party chief Shinzo Abe, who could become the next prime minister after December’s general election due to his party’s popularity, heaped pressure on the Bank of Japan by calling Thursday for unlimited monetary stimulus.
“The biggest economic problem is prolonged deflation and a strong yen,” Abe, president of the largest opposition party, said in a speech in Tokyo. “Markets will only start to react once unlimited monetary easing is conducted.”
The yen sank to a six-month low against the dollar after Abe’s comments as markets priced in the possibility of more easing by the BOJ if the LDP wins the Dec. 16 election. RBS Securities Ltd. and JPMorgan Chase & Co. expect the central bank in December to increase monetary stimulus for the fifth time this year.
“The BOJ will have to become much more aggressive,” said Yasuhide Yajima, chief economist at NLI Research Institute, an affiliate of Nippon Life Insurance Co.. “Markets will become sensitive about what Abe has to say on monetary policy.”
Prime Minister Yoshihiko Noda will dissolve the Lower House on Friday, triggering an election that polls show his ruling Democratic Party of Japan will soundly lose, three years after the DPJ was voted to office, ending the LDP’s near half-century grip on power.
The yen touched 80.95 against the dollar in Tokyo following Abe’s remarks, the lowest level since April 26, and was down 0.8 percent at 80.89 as of 3:09 p.m Thursday.
The BOJ on Oct. 30 conducted its first back-to-back monthly monetary stimulus since 2003, in a bid to achieve its 1 percent inflation goal. The bank also unveiled an unlimited lending program and issued a joint statement with the government on reversing more than a decade of deflation.
JGBs worst performers
Japanese government bonds are the worst performers this year among developed markets, a sign that Bank of Japan Gov. Masaaki Shirakawa has reached the limit of what can be achieved with debt purchases to spur the economy.
While Shirakawa said last month he’s “sad” the U.S. Federal Reserve is seen doing more than the BOJ when his bank pioneered quantitative easing, he’s at the bottom of the class in terms of driving bond gains.
The 2.05 percent rally in JGBs is the least among markets tracked by the European Federation of Financial Analysts Societies and Bloomberg. One- to 10-year yields have fallen 13 basis points in Japan, compared with a drop of 41 basis points worldwide, data compiled by Bank of America Merrill Lynch show.
Along with its waning influence on long-term rates, the BOJ has failed to come close to its 1 percent inflation goal, with consumer prices slumping for the fifth straight month in September, according to government data.
Now that a Lower House election looms, Shirakawa is under increasing pressure to add to stimulus after data showed the economy shrank last quarter by the most since March 11, 2011, natural disasters.
“Japan’s bond yields are already so low that their declines are also small, and that limits capital gains,” said Satoshi Yamada, manager of fixed-income trading at Okasan Asset Management Co., which oversees the equivalent of about $11 billion. “It doesn’t make much sense to have high expectations that BOJ policy can defeat deflation.”
The benchmark 10-year note yielded 0.755 percent in Tokyo Thursday, the lowest globally after Switzerland and Hong Kong and compared with 1.59 percent for similar-maturity Treasuries. Japan’s rate slid to 0.72 percent July 23, a level unseen since June 2003.
The BOJ conducted quantitative easing for five years through March 2006 to counter deflation, which hampers economic growth by discouraging consumption and investment. In that bout of easing, the BOJ referred to the supply of money as a policy target rather than borrowing costs. The Fed initiated a similar program in 2008, followed by two more rounds of bond purchases.
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