Prime Minister Shinzo Abe on Friday praised the Bank of Japan for its decision to introduce unprecedented monetary easing measures to fight chronic deflation, while Finance Minister Taro Aso warned the bank could face difficulty achieving its 2 percent inflation goal.
“It is truly bold monetary easing on different levels, sending clear messages to markets,” Abe told a Diet committee meeting, adding the BOJ acted “as I had expected.”
Abe also said new BOJ Gov. Haruhiko Kuroda is “committed” to achieving their shared goal of 2 percent inflation within around two years.
But Aso separately told reporters it won’t be “so easy” for the BOJ to attain that target, as consumer prices have generally been falling for years.
At its first meeting chaired by Kuroda, the BOJ Policy Board decided on a set of new measures to pursue stronger monetary easing, including additional purchases of government bonds and other assets from financial institutions to reduce longer-term borrowing costs.
Most notably, the BOJ said it will double the monetary base, or cash in circulation plus current account deposits held by commercial lenders at the bank, in two years’ time, shifting its main monetary policy target from short-term interest rates.
But with the BOJ increasing government bonds on its balance sheets, the government may loosen its fiscal discipline, experts said.
Aso tried to ease such concerns, saying the government is acting under a “decent public finance plan,” suggesting the BOJ will maintain its independence in monetary policy and never print money to directly finance the government.
On Thursday, Hiromasa Yonekura, chairman of Keidanren, called the BOJ’s decision “epoch-making,” saying the bank has come up with “unprecedented, bold credit easing measures.”
Yonekura also called on the government to show markets that it is making efforts to improve its fiscal health, given that there are concerns the BOJ is trying to finance government debt.
Meanwhile in Washington, Janet Yellen, vice chair of the Federal Reserve, said the BOJ’s plan to double its monetary base is appropriate to end deflation.
“What Japan is doing is something that is in their own best interest,” Yellen said Thursday in response to audience questions after a speech in Washington. “It’s something that, if successful, will be good for stimulating growth in the global economy and will be good for us too.
“Taking an aggressive approach to try to end deflation is something I certainly understand,” Yellen said.
“Nominal income, nominal GDP in Japan is slightly lower than it was 20 years ago,” she said. “That’s really remarkable and it’s resulted in all kinds of problems for Japan.”
But billionaire investor George Soros was skeptical, saying expanding monetary easing may trigger “an avalanche” in the yen as Japanese put money elsewhere in anticipation of sustained currency depreciation.
Calling the expanded stimulus “a sensation” and “a very daring undertaking,” Soros said policymakers may not be able to arrest the fall in the yen and capital flight as the new policy was adopted after 25 years of mounting government deficits and failure to rejuvenate the economy.
“What Japan is doing is actually quite dangerous because they’re doing it after 25 years of just simply accumulating deficits and not getting the economy going,” Soros said in an interview with CNBC in Hong Kong Friday. “If the yen starts to fall, which it has done, and people in Japan realize that it’s liable to continue and want to put their money abroad, then the fall may become like an avalanche.
“If what they’re doing gets something started, they may not be able to stop it,” Soros said.
Kuroda gets Diet nod
The Diet approved on Friday the administration’s reappointment of Bank of Japan Gov. Haruhiko Kuroda for a full five-year term after he serves out the remainder of his predecessor’s tenure.
The proposal to reappoint Kuroda, who took office March 20, to a new term starting Tuesday, was approved with support from both the ruling and opposition parties in both Diet houses.
During a confirmation hearing in the Lower House prior to Friday’s plenary sessions, Kuroda said the BOJ’s aggressive monetary easing will increase demand for funds and lead to “fundamentally changing expectations” of financial markets and the private sector.