Insight: Under siege, Japan central bank wakes up to political reality

Fri Dec 28, 2012 1:18pm EST
 

By Leika Kihara

TOKYO (Reuters) - Within a day of Shinzo Abe's Liberal Democratic Party sweeping to power in elections this month, elite bureaucrats in Japan's central bank rushed to ready what amounted to a surrender offer.

Abe had run his campaign with a relentless focus on economic policy and had called on the Bank of Japan (BOJ) to take drastic steps to end the nation's long bout of deflation, or else face a radical makeover at the hands of parliament.

The vote had become an unexpected referendum on the BOJ itself, and the bank had lost.

Senior officials concluded that to preserve the BOJ's scope to act in a future crisis, it needed to move quickly to show it recognized reality, according to people familiar with the hurried deliberations. Abe had won a mandate for more forceful monetary easing, and Japanese taxpayers were frustrated with an economy slipping back into its third recession in five years.

In the early afternoon of December 18, two days after the vote, BOJ Governor Masaaki Shirakawa was to pay a courtesy call on Abe. But even before then, a post-election plan had taken shape: the BOJ would consider the kind of ambitious 2 percent inflation target that Abe had insisted was needed to pull Japan out of nearly two decades of deflation and diminished expectations.

It was an about-face for Shirakawa who, since taking his post in 2008, had argued that by focusing too narrowly on consumer prices, the BOJ could miss signs of an asset price bubble like the one Japan experienced in the late 1980s.

But increasingly his own senior officials and members of the BOJ's policy-setting board were ready to take risks and test unorthodox and unproven measures that Shirakawa had long resisted, such as an unlimited debt-fuelled monetary expansion, officials familiar with their thinking say.

"The LDP's win was just too big, and it won an election calling for a 2 percent inflation target. If that's the will of the people, the BOJ must respect that," said a source familiar with the central bank's thinking. "Otherwise, the BOJ could lose everything, including its independence."   Continued...

 
A man walks past the Bank of Japan headquarters in Tokyo December 19, 2012. REUTERS/Yuriko Nakao