Tokyo: The Bank of Japan will consider easing monetary policy again this month while also mulling a doubling of its inflation target to 2 per cent, sources say, as the economy’s weakness threatens to delay its escape from two decades of deflation.
Any easing will likely take the form of another increase in the BoJ’s 101 trillion yen (Dh4.2 trillion, $1.2 trillion) asset buying and lending programme, mostly for purchases of government bonds and treasury discount bills, sources familiar with its thinking say.
Under intense pressure from new Prime Minister Shinzo Abe, the BoJ will likely adopt a 2 per cent inflation target at its January 21-22 rate review, double its current goal, and issue a statement with the government pledging to pursue bold monetary easing steps, the sources say.
By accompanying the new target with more stimulus, the BoJ hopes to show its determination to get the country out of deflation and fend off more radical demands from politicians, such as a revision to the BoJ Law guaranteeing its independence in guiding monetary policy.
“The trend for prices is weak and that’s a concern. The outlook for overseas economies is also highly uncertain,” said one of the sources who spoke on condition of anonymity due to the sensitivity of the matter.
Markets have not been expecting the BoJ to follow up December’s stimulus so quickly, and instead had been speculating on what new policy steps it might take. The 2 per cent inflation target has been largely priced in after the BoJ pledged last month to review its current price goal.
After the December easing, Governor Masaaki Shirakawa stressed how much money the BoJ was already pumping into the economy via asset purchases, which was seen as a sign of his reluctance to boost stimulus further.
If the BoJ does ease in January, it would be the first time it has expanded stimulus at successive meetings since 2003, when it was battling a banking crisis amid a five-year experiment with quantitative easing that lasted until 2006.
However, an increase in asset purchases would still disappoint those investors expecting the BoJ to try bolder action in response to Abe’s calls for radical steps.
Some BoJ board members have floated other options, such as committing to buy assets open-endedly or cutting the 0.1 per cent interest the BoJ pays on excess reserves that financial institutions park with the central bank.
But those ideas have not made much headway and may be put on hold until the conservative Shirakawa’s term ends in April. A lack of new steps could disappoint markets and trigger a rebound in the yen, analysts say.
Abe will revive on Wednesday a top government panel with legal authority to map out economic policy guidelines, and invite the BoJ chief to attend it regularly, giving more opportunity to put pressure on the central bank.
Central bankers are divided over the necessity for further action. Some officials feel the bank has offered enough stimulus for now, having set a 1 per cent inflation target last February and eased policy via an increase in asset purchases five times in 2012.
But a growing number of pessimists fret over persistent price declines and risks for the export-reliant economy, such as the continued slowdown in global growth and slumping sales to China following last year’s territorial dispute.
“I think the BoJ will ease policy this month. Sustainable economic growth with price stability is already part of the BoJ’s mandate,” said Atsushi Mizuno, a former central bank board member who is now vice chairman at Credit Suisse.
“If the BoJ thinks the economy is weakening or straying from the recovery path, then they should ease,” he told Reuters in an interview on Wednesday.
In a quarterly review of its long-term forecasts, also scheduled at this month’s meeting, the BoJ is likely to cut its forecast for economic growth in the fiscal year ending in March from a 1.5 per cent expansion projected in October, the sources said.
While it may slightly revise up its forecast for the next year, the feeble growth projections suggest Japan’s exit from deflation remains some way off, which could help the central bank justify loosening policy again.
Government officials are also turning up the heat, demanding further stimulus as well as a higher inflation target.
Core consumer prices, Japan’s key gauge of inflation, were down 0.1 per cent in November from a year earlier.
Pressure on the BoJ intensified after Abe’s Liberal Democratic Party (LDP) won December’s lower house election by a landslide, calling on the central bank to set a 2 per cent inflation target and ease policy “unlimitedly” to achieve it.
While the central bank is likely to meet Abe’s calls for a 2 per cent inflation target and issue a joint statement with the government, sources said it will not set a deadline for achieving the target, stressing that that 2 per cent inflation is a long-term goal that won’t be achieved unless its easing is accompanied by government efforts to revive growth, such as deregulation.
Though the statement will not be legally binding, it will put the BoJ’s target in the public spotlight and give the government a reason to demand further easing if the goal is not met.