Shinzo Abe was chief Cabinet secretary in 2006 when he backed the Bank of Japan’s interest rate hike, a move that the prime minister-in-waiting, who is growing increasingly intolerant of the nation’s chronic deflation, now says was a mistake.
Abe, whose Liberal Democratic Party swept to victory in Sunday’s Lower House election, is expected to be named prime minister next week, a post he held from 2006 to 2007. With his new mandate, he is expected to try to reshape the BOJ next year when the terms of its governor and two deputies expire.
Abe told BOJ Gov. Masaaki Shirakawa on Tuesday that he wants the bank to set a 2 percent inflation target. The BOJ is forecast to boost its asset purchases as soon as Thursday.
“This is one of the most important monetary policy events for 2013,” said Bruce Kasman, New-York based chief economist at JPMorgan Chase & Co., the firm ranked by Bloomberg Markets as the No. 1 global economic forecaster. “It could potentially be similar to the major change in U.S. monetary policy after the appointment of Paul Volcker.”
U.S. policymakers by the late 1970s recognized the broader costs of inflation on competitiveness and productivity, and backed then-Federal Reserve Chairman Volcker’s efforts to contain it. Any similar shift by Japan with respect to ending deflation would hit incentives to save and make it more attractive to borrow, a potential recipe for faster growth.
Kasman’s colleague, Masamichi Adachi in Tokyo, said the BOJ may adopt a “new style of open-ended asset purchases” this week.
JPMorgan last week boosted its estimate for Japan’s growth in 2013 to 0.4 percent from zero, accounting for fiscal stimulus pledged by Abe. Seventeen of 21 analysts surveyed by Bloomberg expect the BOJ to ease at its Policy Board meeting scheduled for Wednesday and Thursday.
While Japan’s entrenched deflation helps retirees preserve wealth, younger generations are hit by falling wages. Diminished incentives for borrowing meanwhile crimp growth. Unemployment among those aged 15 to 24 was 7.5 percent in October, compared with an unadjusted overall rate of 4.1 percent.
The yen is still stronger than the 100 per dollar that Nissan Chief Executive Carlos Ghosn said is the currency’s “neutral range.”
In the U.S., “people began to recognize inflation’s broader cost and we saw a shift away from viewing it as acceptable,” said JPMorgan’s Kasman. “I don’t think we’ve really seen an aggressive and committed effort to get Japan out of deflation. Political pressures are shifting in a way that may produce that fight.”
Austerity measures in Europe and the territorial dispute with China are dragging down Japan’s exports, with the Japanese economy shrinking in each of the past two quarters, meeting the textbook definition of a recession. Big manufacturers are the most pessimistic in almost three years. An aging population and the world’s biggest public debt make it harder to drive a sustained recovery.
“We have to get the economy out of deflation, correct the strong yen, create jobs and boost growth,” Abe said Monday at a news conference. “That’s our mission.”
Abe, 58, made increased cooperation between the government and the bank a centerpiece of his campaign, saying Nov. 27 that the BOJ “made a mistake” in stopping quantitative easing amid signs of economic recovery in 2006.
The BOJ ended its five-year policy of flooding the lending market with cash in March 2006, when Abe was chief Cabinet secretary.
Four months later, just before Abe became prime minister, the bank raised its key lending rate for the first time in almost six years. By the third quarter of 2007, the economy was contracting and Abe’s popularity had slumped. He resigned, citing illness.
“The most important lesson Abe must have learned was that the economy matters for his popularity,” said Masayuki Kichikawa, Tokyo-based chief economist at Bank of America Merrill Lynch. “Pushing the central bank may be the easiest solution for now due to the debt burden and because deregulation takes too long to realize.”
Since Abe resigned in September 2007, the Nikkei 225 average has fallen by around half as the yen has gained around 40 percent against the dollar, while public debt has grown by a fifth to more than twice the size of the economy.
“There is a limit to what monetary policy can do,” said Hiroshi Miyazaki, chief economist at Shinkin Asset Management Co. “The government must try harder to help companies. Expectations on monetary policy are building up in the market, but the economy needs the government to address lowering growth expectations in a rapidly aging society.”