Bank's independence in question

Abe pledges to make BOJ buy bonds

JIJI, Kyodo, Staff Report

Shinzo Abe said he would consider making the Bank of Japan purchase construction bonds directly from the government to tame chronic deflation if his Liberal Democratic Party wins December’s Lower House election and he becomes prime minister.

Abe, who heads the largest opposition party, also said he would appoint as the central bank’s next governor someone who agrees with his proposed annual inflation target of 2 to 3 percent. BOJ Gov. Masaaki Shirakawa’s term of office is set to expire next April.

“We would carry out necessary public investment and have the BOJ purchase construction bonds to forcibly put money in the market,” Abe said Saturday in the city of Kumamoto, referring to special government-issued bonds to raise funds for public works. “We would take fiscal policy steps as well as monetary policy measures to overcome deflation at an early time.”

The remarks by Abe, a former prime minister, are backed by many LDP members who have called for massive public works spending to stimulate the economy, but are considered controversial by other parties given Japan’s precarious fiscal state and snowballing government debt.

Under current law, the government is obligated to cover fiscal spending with tax income but it is also allowed to issue special construction bonds for public works, for instance to fund new roads and bridges, as politicians claim such infrastructure will be used for years and insist future generations should have to bear the financial burden.

Forcing the BOJ to buy government bonds has been long considered taboo because the move caused hyperinflation and devastated Japan’s economy immediately after the end of World War II.

The fiscal law prohibits the central bank from underwriting government-issued bonds. Any purchases of construction bonds by the BOJ could be considered tantamount to the bank financing fiscal deficits, and could thus cause interest rates to spike.

Prime Minister Yoshihiko Noda has criticized Abe for threatening to undermine the BOJ’s independence, telling a news conference after Friday’s Lower House dissolution, “If a government sets specific monetary policy measures and goals . . . there could be problems in terms of the central bank’s independence.”

Last week, Abe said the BOJ should fall in line with an annual inflation goal of 2 to 3 percent that the LDP would set if it wins the Dec. 16 election and forms the next government. The bank’s current target rate is 1 percent.

The BOJ should provide unlimited liquidity to achieve a 2 to 3 percent inflation target if the LDP is returned to office next month, and its governor should be held accountable if the bank misses the goal and he is unable to adequately explain the failure, according to Abe.

An LDP government would urge the BOJ to implement “unlimited” monetary easing, he said Thursday, stressing the bank’s recent expansion of its asset purchase program is not sufficient to boost the economy and end deflation.

In addition, the BOJ should not only seek price stability as a policy goal but also be held responsible for maintaining employment, as some central banks in other countries do, including the U.S. Federal Reserve, Abe noted.

Meanwhile, he described next month’s general election as a “historic battle (for the LDP) to take back Japan,” saying the party has been polishing its policies in the three years since it was ousted from power by the Democratic Party of Japan in the 2009 poll.