Bank of Japan Bulletin

Masaaki Shirakawa

As many expected, the Bank of Japan has upped the cost in its fight against deflation by increasing the country’s inflation target from 1 percent to 2 percent.


But even the bank’s commitment to hold interest rates near zero and keep buying up assets until the 2 percent inflation target becomes a reality has not overly impressed market watchers.


“(The Bank of Japan) meeting marked yet another faltering step on the path towards reflation,” Sean Shepley, Credit Suisse’s Head of Market Strategies and Product Development, wrote recently. “The reality for reflation still looks more like a slow-burning fuse.”


A joint announcement between the Bank of Japan and government officials said the bank would pursue “open-ended” asset purchases starting next year. The bank also upgraded Japan’s economic growth forecasts, anticipating slightly higher inflation for the next two years and 2.3 percent GDP growth next fiscal year instead of the previously forecast 1.6 percent.


Still, the developments are not as strong as some had hoped. The anticipated ¥10 trillion increase in asset purchases for 2014 marks a sharp decline from the ¥34 trillion annual increase planned for this year, Credit Suisse’s Chief Japan Economist Hiromichi Shirakawa points out.


Achieving the inflation targets may be challenging, since the Bank of Japan and government said in a joint statement announcing the policy change that consumer prices are expected to drop slightly in the fiscal year ending in March and increase by just 0.4 percent next year.


Prime Minister Shinzo Abe’s government had pressured the Bank of Japan and Gov. Masaaki Shirakawa to enact bolder monetary policy in the run-up to January’s meeting. In light of the new policies, Abe’s chief cabinet secretary backed away from earlier threats by the Prime Minister’s LDP Party to push for reforms that would undermine the central bank’s independence.


But Bank of Japan Gov. Shirakawa is also pressing the government to enact structural reforms to ensure sustained economic growth, warning that monetary action alone won’t single-handedly jumpstart the country’s economy. The central bank’s leader cautioned that with a crushing government debt burden twice the size of Japanese GDP, fast-rising interest rates without any accompanying economic growth could quickly balloon the debt even further.


Already, there have been concerns in some corners about how Japan can breathe life into its economy without increasing its already considerable debt load too much. Earlier this month, Abe announced a ¥10.3 trillion government stimulus program.


The joint statement issued by the government and central bank last week called for further action and reforms.


“The Government will, in order to revitalize Japan’s economy, not only flexibly manage macroeconomic policy but also formulate measures for strengthening competitiveness and growth potential of Japan’s economy,” the statement said, adding that such measures could include research and development investments, regulatory reforms and “better utilizing the tax system.”


Japan-watchers will be keeping a close eye on the path forward for other reasons – namely, the Bank of Japan is due for a newly appointed governor within the next two months. Although last week’s policy decision was a disappointment, Credit Suisse analysts say, the prospect of a new governor is likely to keep the market hoping for more.


Photo courtesy of AP Photo/Kyodo News