The Bank of Japan is expected to modify its monetary easing campaign this week with a 2 percent inflation target after being driven into a political corner by Prime Minister Shinzo Abe, who has put priority on beating chronic deflation.
But it remains to be seen whether the BOJ can act aggressively enough to satisfy the new Abe administration because the central bank apparently has few conventional policy weapons left in its arsenal and little hope of accomplishing the feat with monetary policy alone in any stable way.
If the independent BOJ loosens its monetary grip at the two-day meeting starting Monday, it would be the first time in more than nine years it has done so in two consecutive policy meetings, signaling a drastic approach.
The inflation target is likely to be presented as a joint government-BOJ decision on “policy coordination,” but the reality is that the independent BOJ “has been forced to implement very bold easing steps,” said Takeshi Minami, chief economist at Norinchukin Research Institute.
The bank should take the steps “right now” to help Abe reach his goal of pulling the world’s third-largest economy out of a deflationary recession before two-stage doubling of the consumption tax begins in April next year, Minami said.
But political hurdles abound. The legislation for the tax hikes, enacted in August, states that the government must try to achieve nominal economic growth of around 3 percent and real growth of about 2 percent, with prices rising by 1 percent, before going ahead with the tax hikes.
Although this is a nonbinding target, it is likely to become a political prerequisite for pushing the hikes through.
In addition, the BOJ will likely be held responsible for giving regular progress reports to the government on the inflation goal, the sources said.
The Abe administration and the BOJ are set to release the joint statement after the BOJ Policy Board meeting ends on Tuesday, according to the sources.
Since last February, the BOJ — which has been actively expanding its asset purchasing program — has been stating that its inflation goal for the medium to long term is a “positive range of 2 percent or lower,” with a specific “goal of 1 percent for the time being.”
BOJ Gov. Masaaki Shirakawa is believed to be reluctant to set a higher target, given that other experts think 2 percent inflation would sharply raise food and energy costs while leaving the nation’s stagnant wages behind, hurting the average household.
Shirakawa decided last month to conclude a review of the inflation goal this month, as requested by Abe, whose conservative Liberal Democratic Party returned to power after three years in the opposition following the Dec. 16 general election.
The additional easing to be pondered at the meeting, which started Monday, are likely to center on expanding the BOJ’s asset purchasing program by around ¥10 trillion, the sources said. In December it raised it by the very same amount, to ¥101 trillion.
The BOJ is also expected to discuss the possibility of adopting open-ended easing steps similar to those used by the U.S. Federal Reserve, such as buying government bonds and other relatively safe financial assets without setting a deadline, they said.
It could even boost purchases of riskier assets, including exchange traded funds, to help pump even more money into the market and bolster demand, possibly effecting higher prices, the sources added.
Some pundits, however, said it is difficult to see the BOJ mapping out more ways to conquer the deflation that has plagued the nation for over a decade, given its track record following the implosion of the late 1980s bubble economy around 1990.
Even if the BOJ sets a 2 percent inflation target, it will not adopt drastic monetary easing steps, said Hideo Kumano, chief economist at Dai-ichi Life Research Institute, noting that “astonishing methods” are “impossible.”