Analysis: Walking fine line, BOJ head warns of risks of easing

Sat Apr 21, 2012 8:27pm EDT
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By Leika Kihara

WASHINGTON (Reuters) - Bank of Japan Governor Masaaki Shirakawa has been doing his best to keep in check expectations of major new stimulus by the central bank next week.

Three times during a week-long tour of the United States, Shirakawa stressed that monetary easing alone cannot beat deflation and that too much stimulus, in the form of quasi-fiscal policy, could have drawbacks. He walked a fine line between sounding the message that easy policy still has a role in supporting Japan's weak economy and warning of the risks of too much easing.

Sources familiar with the central bank's thinking have said the BOJ, when it meets on Friday, will consider an increase in asset purchases as way to give a further boost to the economy and to show its determination of achieving the 1 percent inflation target it set in February.

Investors sold yen when Shirakawa said in New York on Wednesday that the BOJ will continue to pursue powerful monetary easing by keeping interest rates at zero and continuing to buy assets to nudge down borrowing costs.

But that phrase was just a repeat of the BOJ's standard line on its existing ultra-easy policy. It was added by Shirakawa's staff who worried about a repeat of the kind of political reaction to a speech the central bank governor made in Washington last month. On that occasion he focused on the risks of easy policy and angered domestic lawmakers who thought he was not aggressive enough in beating deflation.

This week in New York and Washington, ahead of weekend meetings of the International Monetary Fund and the Group of 20 leading economies, Shirakawa spent most of two speeches arguing that deflation was only a symptom of the bigger ills plaguing Japan, such as its shrinking population and low productivity.

"If the Japanese economy is to extricate itself from deflation and return to a path of sustainable growth under price stability, it requires both policies aimed at enhancing growth potential and supporting monetary stimuli," he said in New York on Wednesday.

A day later, he preached to an audience in Washington about the danger of keeping monetary stimulus in place for too long, citing Japan's failure to forestall an asset price bubble in the 1980s that led to a severe economic downturn when it burst.   Continued...

Governor of the Bank of Japan Masaaki Shirakawa arrives at the G-20 meeting during the spring International Monetary Fund (IMF)-World Bank meetings in Washington April 20, 2012. REUTERS/Yuri Gripas