Japan central bank set to vow boldest action yet to lift economy

TOKYO Tue Jan 22, 2013 3:34am IST

A man looks at a stock index board outside a brokerage in Tokyo January 18, 2013. REUTERS/Kim Kyung-Hoon

A man looks at a stock index board outside a brokerage in Tokyo January 18, 2013.

Credit: Reuters/Kim Kyung-Hoon

Related Topics

Priyanka Gandhi Vadra, daughter of Congress party chief Sonia Gandhi, adjusts her flower garlands as she campaigns for her mother during an election meeting at Rae Bareli in Uttar Pradesh April 22, 2014. REUTERS/Pawan Kumar

Election 2014

More than 814 million people — a number larger than the population of Europe — are eligible to vote in the world’s biggest democratic exercise.  Full Coverage 

TOKYO (Reuters) - The Bank of Japan is set on Tuesday to unveil its most determined effort yet to beat years of economic stagnation, but the big challenge will be how to impress markets already pricing in a doubling of its inflation target and further asset buying.

Under pressure from new Prime Minister Shinzo Abe for bolder action to overcome deflation and lift the economy out of recession, the central bank will issue a joint statement with the government pledging to pursue aggressive monetary easing to achieve a target for inflation of 2 percent, a level achieved in only a handful of months since the late 1990s.

Such a pledge will keep the BOJ under political pressure to deliver economic stimulus steps beyond its regular policy prescription of the past few years of topping up an asset-buying and lending programme, analysts say.

"This will be a historical meeting for the BOJ that marks a big change in its policy framework, so the bank will be under pressure to deliver something new," said Masaaki Kanno, chief Japan economist at JPMorgan Securities.

"Doing the same thing it did in December won't be enough. The BOJ needs to show it has changed. Otherwise, we may see a reversal in the current yen-weakening trend," he said.

The yen has dropped 13 percent against the dollar in the past two months to hit a two-and-a-half-year low on expectations Abe will force the central bank into bolder action. Tokyo stocks have jumped by a fifth on the view the weaker yen will boost the export earnings of the likes of Nissan Motor Co and Canon Inc.

That leaves room for market disappointment, analysts say, if the central bank does no more than announce its new inflation target and raise the ceiling of its asset-buying programme by 10 trillion yen, the most regular increment in policy easings of the past year.

Instead, policymakers will have to consider other measures to impress investors and keep pressure on the yen, considered key to Japan's economic fortunes as the country struggles with its fourth recession since 2001.

One option would be to make an open-ended pledge to buying assets. The ceiling on the current programme is 101 trillion yen and it runs until the end of the year.

Another option would be to scrap a 0.1 percent floor paid on short-term deposits at the central bank to encourage lending, sources have told Reuters.

A joint BOJ and government statement will likely set 2 percent inflation as a medium-term target without a binding deadline. The hope is that modestly rising prices will lift the economy by encouraging consumers to buy before prices get any higher.

Sources said the BOJ governor will be asked to report regularly to the government's top economic council on progress towards achieving the inflation target.

For the government's part, Abe has promised a boost to spending to help get the economy back on its feet. Abe's stimulus may give the economy only a temporary boost at best unless he follows through with politically more difficult economic reforms, such as deregulating protected sectors such as agriculture, analysts say.

Still, Abe is likely to keep pressure on the BOJ for more stimulus even after Tuesday's meeting at least until an upper house election expected in July.

Abe is also expected to try to install a central bank governor more sympathetic to aggressive monetary policy easing when incumbent Masaaki Shirakawa's term ends in April. Shirakawa has maintained that monetary policy alone can not pull the economy out of deflation.

(Editing by Neil Fullick)

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.

  • Most Popular
  • Most Shared

REUTERS SHOWCASE

Global Economy

Global Economy

Chinese factories stalling as euro zone business picks up  Full Article 

M&M Upgraded

M&M Upgraded

Credit Suisse upgrades Mahindra & Mahindra to 'outperform'  Full Article 

HRW Report

HRW Report

Bigoted teachers lead marginalised Indian school kids to drop out  Full Article 

Breakingviews

Breakingviews

Manchester United’s crisis has silver lining  Full Article 

Reuters India Mobile

Reuters India Mobile

Get the latest news on the go. Visit Reuters India on your mobile device.  Full Coverage