Bank of Japan Keeps Rate at 0.1% as Kan Urges Deflation Fight
Nov. 20 (Bloomberg) -- The Bank of Japan kept interestrates near zero and raised its economic assessment even asgovernment pressure for it to fight deflation intensified.
Governor Masaaki Shirakawa and his colleagues held theovernight lending rate at 0.1 percent, the central bank said ina statement today in Tokyo. The release came hours after DeputyPrime Minister Naoto Kan warned about the danger that fallingprices pose to Japan’s recovery from its worst postwar slump.
The divergence in judgment on the economic outlookindicates tensions may escalate between Prime Minister YukioHatoyama’s government and the central bank. By highlightingdeflation, politicians are sending signals to the bank that itshould increase its purchases of government bonds, analysts say.
“Given the bank’s independence, the government can’t askthe BOJ directly to cut rates or buy more bonds,” said HiroshiMiyazaki, chief economist at Shinkin Asset Management Co. inTokyo. “That’s why it’s using this term ‘deflation’ to forcethe BOJ to step up its accommodative measures.”
The yen traded at 88.85 per dollar at 5:21 p.m. in Tokyo,little changed from 88.88 before the announcement. The yield onJapan’s 10-year bond rose half a basis point to 1.305 percent,after earlier touching 1.285 percent, the lowest since Oct. 9.All 22 economists surveyed by Bloomberg expected the ratedecision, which was unanimous.
‘Picking Up’
“Japan’s economy is picking up mainly due to variouspolicy measures taken at home and abroad, although the momentumof a self-sustaining recovery in domestic private demandremains weak,” the central bank said.
Shirakawa said at a press briefing that the government andthe central bank share the view that prices will keep falling.He said they are declining because of weak corporate andconsumer demand and policy makers should implement measures toboost growth expectations and spending.
“When there is a shortage of demand in the economy,providing liquidity alone won’t help to push prices higher,”he said, indicating an aversion to buying more government bonds.
When asked what the central bank can do to arrest pricedeclines, the governor reiterated that his board is committedto prolonging its low-rate policy. The BOJ will keep thebenchmark rate at 0.1 percent through 2010, according to 15 of17 economists surveyed by Bloomberg News this month.
Deflation Declaration
The government said today that the economy “is in a milddeflationary phase,” referring to declining prices in itsevaluation for the first time since June 2006.
Gross domestic product grew an annualized 4.8 percent lastquarter, the fastest pace in more than two years, while a gaugeof prices excluding imports tumbled the most in 51 years, aCabinet Office report showed this week.
Discounts by retailers from Aeon Co. to Fast Retailing Co.are helping push down consumer prices, which slid 2.3 percentin September, a seventh drop. The central bank said last monthit expects them to keep sliding through fiscal 2011.
Sustained price declines threaten to squeeze profits andwages, smothering demand in an economy that analysts say mayslow in coming months as global stimulus measures are withdrawn.Deflation blighted Japan during its so-called lost decade ofstagnation after an asset bubble burst in the early 1990s.
Kan said the government will tell the central bank thatmonetary policy “plays a significant role” in tacklingfalling prices. His concern was echoed by other ministers.
‘Sense of Crisis’
Finance Minister Hirohisa Fujii said there’s a “sense ofcrisis” about falling prices. He called on the central bank torespond to the deflation threat, while acknowledging rates arealready “very low,” limiting room for further monetary action.
Shirakawa said inflationary expectations are stable andthe financial system is solid, signaling he sees little riskprice declines will snowball into a deflationary spiral.
Japan’s price slump contrasts with the rest of Asia, wherelow interest rates and fiscal stimulus have heightened the riskof asset bubbles. India and South Korea will need to tightenmonetary policy to tame inflation, the Organization forEconomic Cooperation and Development said yesterday.
The OECD said an increase in the Bank of Japan’sgovernment bond purchases would combat deflation by addingliquidity to markets and pushing up price expectations.
Increasing the monthly debt buying from the current 1.8trillion yen ($20 billion) may also help to contain long-terminterest rates as the government struggles to restrict thebudget amid a slump in tax revenue. Shirakawa has said thebank’s debt purchases aren’t aimed at funding fiscal spending.
Some analysts say an increase of the purchases may causeJapan’s fiscal burden, the world’s largest, to balloon andprompt investors to dump bonds, driving yields higher.
“Sure, more fiscal spending by the government combinedwith more bond buying by the central bank may make it easierfor Japan to get rid of deflation,” said Masaaki Kanno, chiefeconomist at JPMorgan Chase & Co. in Tokyo, who used to work atthe central bank. “But it’s problematic if the central bankkeeps raising bond purchases without limit.”
To contact the reporters on this story:Mayumi Otsuma in Tokyo motsuma@bloomberg.net;Toru Fujioka in Tokyo at tfujioka1@bloomberg.net
Last Updated: November 20, 2009 03:29 ESTSource: Bloomberg
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