The Bank of Japan began a two-day policy meeting Tuesday amid growing calls by the government and the ruling coalition that it further ease credit to overcome deflation.

The BOJ Policy Board is expected to discuss whether such steps are necessary. If the central bank decides to take additional monetary easing steps, it would be the first time since February, when it decided to increase its monthly outright purchases of long-term government bonds to 1 trillion yen from 800 billion yen.

The BOJ has been under pressure to take more steps since the Nikkei average sank to a fresh 19-year low earlier this month. The government is worried that such plunges will lower the capital adequacy ratios of major banks to dangerous levels.

On Tuesday morning, Chief Cabinet Secretary Yasuo Fukuda fired the latest shot at the BOJ, urging it to take “effective and bold” monetary policy steps at the meeting.

“We hope they will conduct an effective and bold monetary policy,” Fukuda told a news conference. “The government would like to share the view with the Bank of Japan that overcoming deflation should be the top priority in terms of the management of the economy.”

But it is difficult to determine what will happen at the meeting, given that the BOJ has maintained that its current ultra-easy monetary policy has been keeping the banking system awash with a steady supply of funds and that additional steps are not necessary.

The ruling coalition and Cabinet ministers, including economic and fiscal policy minister Heizo Takenaka and Finance Minister Masajuro Shiokawa, have urged the BOJ to take new steps, such as using pension money to play the stock market by purchasing exchange-traded funds. ETFs track certain stock market indexes.

While such calls are growing stronger, there are also worries that the proposed steps are dangerous. Some experts say the health of the BOJ could be damaged if it gave in and started buying ETFs.

However, it is likely that the BOJ will at least consider the new steps in light of Prime Minister Junichiro Koizumi’s strong determination to arrest deflation.

As early as by the end of this week, Koizumi is expected to compile a new package of measures focused on disposing more of the nonperforming loans held by banks.

The BOJ will is scheduled to unveil its monthly assessment of the economy on Thursday, to be followed by a news conference by BOJ Gov. Masaru Hayami on Friday.

Forget bad loans: Aso

The top policymaker in the Liberal Democratic Party urged the government Tuesday to focus on measures to stimulate the economy, including tax incentives to boost real estate transactions, instead of accelerating the disposal of bad loans weighing down the nation’s banks.

“What is needed now is an economic stimulus package,” said Taro Aso, chairman of the LDP Policy Research Council.

Aso said he opposes a proposal to inject banks with public funds to bolster their weak capital bases and to accelerate bad-loan disposals, saying “that is not the kind of issue we should discuss now.”

He said there is little point in tackling the bad-loan problem at this point because they will keep growing unless the decline in land prices is halted.

Aso said that the government should instead focus on tax reforms designed to stimulate property transactions, along with gift and inheritance tax reforms and investment tax credits.

Aso also criticized the Bank of Japan over repeated calls by BOJ officials for the government to inject banks with public funds.

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