The Bank of Japan on Tuesday adopted a 2 percent inflation target, caving in to pressure from Prime Minister Shinzo Abe, while calling for closer coordination and implementation of bold measures to fight deflation in a joint statement released with the government.
In showing its resolve to follow Abe’s ultra-loose monetary policies, the central bank also introduced an “open-ended” asset purchase plan.
“This is an epoch-making accord in terms of boldly revising the country’s monetary policies,” Abe said after the agreement was reached following a two-day meeting of the BOJ Policy Board.
“We made it clear that there will be a regime change in macroeconomic policymaking,” Abe added.
According to the agreement, the central bank will pursue monetary easing and aim to achieve the “price stability target of 2 percent as soon as possible.” Last February, the bank set a 1 percent price stability “goal.”
The BOJ Policy Board also agreed to an indefinite asset purchase as an aggressive form of monetary easing. Instead of simply adding to its ¥101 trillion asset purchase program, the open-ended commitment will see the bank buying about ¥13 trillion in financial assets, including some ¥2 trillion in government bonds, every month for as long as necessary, from next January.
Seven of the nine Policy Board members signed off on the decision to double the inflation target. The open-ended asset purchase was unanimously agreed to, as was the continuation of the virtually zero interest rate policy.
“The BOJ took additional steps to provide monetary accommodation decisively,” Gov. Masaaki Shirakawa said at a news conference after the meeting.
Under the “Joint Statement of the Government and the Bank of Japan on Overcoming Deflation and Achieving Sustainable Economic Growth,” the bank will also ascertain whether there is risk to sustainable economic growth, including the “accumulation of financial imbalances.”
The two sides also agreed the government should “flexibly manage macroeconomic policy” and “formulate measures for strengthening competitiveness and growth potential of Japan’s economy.”
Progress by both sides will be reviewed at the Council on Economic and Fiscal Policy, where price stability, economic and fiscal conditions and employment will also be closely monitored, the agreement said.
“The accord was reached for the government and the BOJ to recognize each other’s roles and work together effectively,” Shirakawa said.
Doubling the BOJ’s inflation goal from 1 to 2 percent was one of the Liberal Democratic Party’s key campaign pledges ahead of the general election last month.
Although the preceding government, led by the Democratic Party of Japan, and the BOJ had been reluctant to take the step, Abe had even hinted at revising the Bank of Japan Law to realize his objectives. The central bank not only agreed to raise the inflation rate from 1 to 2 percent, but also branded it a “price stability target” instead of a “goal.”
Chief Cabinet Secretary Yoshihide Suga said it was no longer necessary to revise the BOJ law now that the bank and the government have agreed on a joint statement.
Within a month of taking power, Abe’s Cabinet has come up with a series of economic proposals, including a ¥20.2 trillion economic stimulus package focused on public works spending and a ¥13.1 trillion supplementary budget.
Outline of BOJ-government accord
The Bank of Japan will:
• Strengthen policy cooperation with the government.
• Set a price stability target at 2 percent in terms of a year-on-year rise in the consumer price index.
• Pursue monetary easing to achieve the price target as soon as possible.
The government will:
• Formulate measures to strengthen competitiveness and growth potential of the economy, including regulatory reforms and better utilization of the tax system.
• Promote measures to establish a sustainable fiscal structure.
• Regularly review progress in policy implementation, employment and other conditions and structural reforms.
The BOJ decided to:
• Take additional steps to provide monetary accommodation decisively.
• Introduce an “open-ended asset purchasing method” without a deadline.
• Start buying about ¥13 trillion in financial assets every month, including ¥2 trillion in Japanese government bonds, starting in January 2014 without setting any termination date.
• Encourage the unsecured overnight call rate to stay in the zero to 0.1 percent range.
• Raise the growth forecast for fiscal 2013 real gross domestic product to 2.3 percent from the 1.6 percent projected in October.
• Leave unchanged the forecast for the fiscal 2013 core consumer price index at a 0.4 percent rise.
Dubbed “Abenomics,” just the mention of these policies has helped the yen ease against the dollar and approach the ¥90 line for the first time since 2010. Stock prices have also surged in hopes that a weaker yen will aid Japanese companies competing overseas for market share.
But some pundits say that recent developments, including Tuesday’s agreement between the BOJ and the government, are cause for concern. “The BOJ is being pushed around and has been yielding to the demands of the government,” Yasunari Ueno, chief market economist at Mizuho Securities Co., told The Japan Times.
Ueno warned the asset purchase program may be going to the well too often. “It feels like the monetary easing is being used merely as a way to ease the yen,” he said, adding that the government could be too focused on short-term economic recovery and neglecting long-term issues.
Excessive pressure from the government and the BOJ’s lack of resistance could damage trust in the central bank and even induce capital flight. Depending on the BOJ to purchase government bonds also risks expanding Japan’s bloated debt, Ueno said.
Shirakawa on Tuesday reiterated that the bank’s independence is not threatened and that it will make its own decisions according to its responsibilities.
But while it is difficult to judge how much independence the BOJ should be afforded, it “could have shown more insight as a central bank of a developed economy instead of bowing to Abe’s pressure,” Ueno added.
Meanwhile, the BOJ on Tuesday also released its revised growth forecast, revising down GDP growth for fiscal 2012 to 1.0 percent from October’s projection of 1.5 percent. But the outlook for fiscal 2013 was upgraded from 1.6 percent to 2.3 percent, reflecting the impact of the government’s economic stimulus package.