Japan just might be set to open a new chapter

Sun Mar 31, 2013 3:03pm EDT
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By Alan Wheatley, Global Economics Correspondent

LONDON (Reuters) - ‘Historic' is an overused word. But if the Bank of Japan meets expectations and embarks this week on a radical policy shift to crush deflation, the meeting will go down as, well, historic.

Because of gently falling prices, Japan has not grown in nominal terms for two decades, reducing its relevance for the global economy.

But all that could change if the BOJ's new governor, Haruhiko Kuroda, shows he is indeed serious about hitting the central bank's new inflation target of 2 percent.

"This is their best shot at reviving the economy," said Jerry Webman, chief economist at OppenheimerFunds in New York. "Even a modest improvement in the world's third-largest economy is going to add ... to overall global growth."

At a two-day rate review that ends on Thursday, the central bank is likely to start open-ended asset purchases immediately, rather than from 2014. The BOJ will also probably extend the maturity of the bonds it buys and set a new policy target focusing on the size of its balance sheet, sources familiar with the bank's thinking told Reuters in Tokyo.

Japan badly needs nominal gross domestic product to start expanding again so that the government's debt does not become unbearably large as a share of GDP. It is already dizzyingly high at 235 percent of annual output.

Rising prices also transmit signals about which sectors can most profitably deploy capital and labor. When deflation is entrenched, those market messages are muffled; stagnation sets in, as it has in Japan.

Despite the strong political mandate from Prime Minister Shinzo Abe, many doubt Kuroda will succeed in reflating the economy without more fundamental reforms such as injecting more competition into the economy and attracting more direct foreign investors - something Japan has shown little appetite for.   Continued...

Bank of Japan's (BOJ) Governor Haruhiko Kuroda speaks during the upper house Financial Affairs committee of the Parliament in Tokyo March 28, 2013. REUTERS/Yuya Shino