Deflation beatable in months: Abe adviser

Bloomberg

Bank of Japan Gov. Masaaki Shirakawa’s former professor said the next central bank chief could end decades of deflation in just months by going beyond the current head’s “very weak” efforts.

The BOJ shouldn’t ease until inflation of 2 or 3 percent is reached, Koichi Hamada, 76, a retired Yale University economics professor who taught Shirakawa at the University of Tokyo, said in an interview Tuesday.

That would be “no problem” if opposition leader Shinzo Abe, whom Hamada advises on policy, wins the Dec. 16 Lower House election with his Liberal Democratic Party, as polls suggest, and appoints a more aggressive central bank chief, he said.

Politicians including Abe are increasing pressure on the BOJ for more monetary stimulus before a leadership change at the bank that offers any new government the chance to install a proeasing majority on the bank’s Policy Board. Shirakawa, criticized for his perceived failure to reverse years of deflation and boost an economy at risk of recession, ends a five-year term April 8.

“Shirakawa forgot the right kind of economics,” Hamada said from his home in Wallingford, Connecticut, adding that his former student merits a “C” grade for his performance at the helm of the BOJ. “He sticks to his principles and doesn’t use flexible political judgment.”

The yen fell to a seven-month low in November after Abe, 58, called for unlimited monetary stimulus and an inflation target of 2 to 3 percent, easing pressure on exporters and pushing monetary policy to the foreground in his campaign for the poll.

An economy at risk of a second straight quarter of contraction could spur an Abe-led government to seek a proeasing majority at the BOJ, as the terms of Shirakawa’s deputies, Hirohide Yamaguchi and Kiyohiko Nishimura, end in March and two former private-sector economists on the nine-member Policy Board show signs of favoring more stimulus.

Hamada taught Shirakawa in 1972. He said the governor was an “intellectual-looking” student who would frankly criticize his opinions. But as head of the BOJ, his policy of buying short-term government bonds is “very weak,” Hamada said.

Hamada, who in 2001 suggested that the BOJ should adopt an inflation target of 1 percent to help change price expectations, said the bank could buy foreign bonds and debt with longer maturities, as well as increase purchases of real-estate investment trusts and exchange-traded funds. Any inflationary concerns could be eased by raising the benchmark interest rate from the current 0.1 percent, he said.

A BOJ spokesman said the governor doesn’t comment on remarks by individuals. Shirakawa, 63, said at a news conference last month that a 3 percent inflation goal is unrealistic and unlimited money printing could worsen the national debt.

Prime Minister Yoshihiko Noda this week called a 2 to 3 percent inflation target unrealistic, and said the BOJ shouldn’t be forced to buy bonds in the open market.

The BOJ set a 1 percent inflation goal in February and has said it will pursue aggressive easing until that target is in sight.

At its meeting Oct. 30, the BOJ added ¥11 trillion to its asset-purchase program, expanding its main policy tool for the second time in two months, and unveiled an unlimited program to support bank loans. Two new board members, Takehiro Sato and Takahide Kiuchi, voted at the meeting for a more expansionary wording of the bank’s price outlook, minutes show.

Abe, who was elected head of the LDP in September and briefly served as prime minister from 2006 to 2007, is not guaranteed his first choice of BOJ governor. Any nomination for the position can be blocked in the Upper House, where the LDP and its opposition partner, New Komeito, hold less than half the seats.

In 2008, the opposition-controlled chamber rejected two candidates for governor put forward by an LDP government before accepting Shirakawa’s nomination.

“What Abe says now as the head of an opposition party is irrelevant,” Yoichi Takahashi, another economic adviser to the LDP chief, said in a separate interview last week. “I don’t think he will say these things if he becomes prime minister.”

Hamada said contenders to succeed Shirakawa under an Abe administration include Kikuo Iwata, an economics professor at Gakushuin University, and Kazumasa Iwata, president of the Japan Center for Economic Research. He also named Heizo Takenaka, an ex-economic policy minister, and Asian Development Bank President Haruhiko Kuroda as potential candidates.