Shirakawa Accelerates BoJ Exit as Abe Presses for Stimulus
Comment of the Day

February 05 2013

Commentary by David Fuller

Shirakawa Accelerates BoJ Exit as Abe Presses for Stimulus

This is another interesting item from Bloomberg. Here is a section
Opposition View

"The BOJ's independence must be guaranteed," Mitsuru Sakurai, policy chief for theDemocratic Party of Japan, said in an interview on Jan. 29. "We need someone who can do that."

The DPJ lost power in the December election little more than three years after ending theLiberal Democratic Party's half century of domination of Japanese politics. The party today released a statement underscoring Sakurai's comments.

Abe needs opposition support to ensure his nominees are approved in parliament's upper chamber, where his LDP lacks a majority.

Japan's economy shrank in the second and third quarters of last year, with economists surveyed by Bloomberg News seeing another decline in the final three months, followed by a return to growth this quarter after the government unveiled a stimulus package.

Shirakawa during his tenure has emphasized that ending two decades of deflation isn't something the bank can do on its own. He also consistently warned against keeping interest rates too low for too long, with the risk that it plants the seeds for asset bubbles.

Abe's Priority

Abe, by contrast, identified ending deflation as a priority during the campaign. Falling prices reduce the incentives to borrow and invest in new business projects, erode tax receipts and increase the attractiveness of saving in cash rather than spending or putting money into stocks or bonds.

With other central banks stepping up monetary stimulus, the yen surged, eroding Japan's export competitiveness, with a report last week showing manufacturing employment fell below 10 million for the first time since 1961. The yen reached a postwar high of 75.35 per dollar in October 2011.

David Fuller's view Despite the opposition DPJ's comments above, no central bank can be entirely independent because the government in power appoints replacement governors as previous terms expire or officials resign.

Masaaki Shirakawa is resigning three weeks before the end of his term, presumably because he wishes to avoid being surrounded by people who are critical of his policies and will change them.

I assume that Shinzo Abe will receive some opposition support, either by votes in favour of the Prime Minister's candidates or sufficient abstentions to ensure a stimulative BoJ. It will be difficult to oppose Abe because his moves to date and additional proposals are widely seen as improving Japan's economic recovery prospects, albeit at the risk of some future inflation. The recent stock market recovery in Japan can also be credited to Abe's views.

(See also yesterday's Email of the day (1) on Japan's prospects.)

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