BoJ deputy says Japan needs bolder measures to unlock growth
The Japanese national flag blows in the wins as the Bank of Japan headquarters stands in Tokyo, Japan, on Tuesday, Feb. 18, 2014. The Bank of Japan boosted lending programs while sticking with a plan for unprecedented asset purchases, as the central bank tries to support a recovery and stamp out 15 years of deflation. Photographer: Kiyoshi Ota/Bloomberg©Bloomberg
The deputy governor of the Bank of Japan has called on the country's government to pull its weight, as the central bank strains to haul the world’s third-largest economy decisively out of deflation.
Last month the BoJ embarked on its latest round of easing, saying it would start charging for excess reserves deposited at the central bank. At the time, it said it wanted to provide a shot of stimulus at a critical moment, just ahead of the annual Spring round of wage negotiations between companies and workers' groups.
In a speech in New York on Friday, deputy governor Hiroshi Nakaso said that the government now needed to do more to boost Japan’s growth potential.
He referred to a joint statement on overcoming deflation, signed by the BoJ and the government in January 2013, a few months before the bank embarked on its first round of easing under the current governor, Haruhiko Kuroda. In it, the central bank pledged to stimulate demand through ultra-aggressive monetary policy while the government promised to pursue “all possible” supply-side reforms.
“Now that the Bank of Japan has taken monetary easing one step further . . . I think that the original ‘third arrow’ of Abenomics, the growth strategy, must also fly faster,” he said.
The unusually candid speech comes as the success of the mix of the policies pursued by prime minister, Shinzo Abe, remains in the balance. After three separate bursts of monetary stimulus from the BoJ, inflation has gained some momentum while corporate profits have been boosted by a sharp drop in the value of the yen.
However, Japan’s potential growth rate remains so low — around or slightly below 0.5 per cent, according to the BoJ’s estimate — that any setback has the potential to tip the country into recession.
Economists at Goldman Sachs expect that the first reading of gross domestic product figures for the fourth quarter, due on Monday, will show an annualised contraction of 1.2 per cent from the third quarter, hit by a slump in consumer spending due to a mild weather and smaller winter bonuses.
The BoJ now fears that many cash-hoarding companies are set to resist calls for higher wages, as they assume that inflation will be kept in check by a combination of weak demand, a lower oil price and a stronger currency. The national trades union group, Rengo, has already signalled a less aggressive stance in this year’s negotiations, saying it is aiming at an across-the-board increase of “around 2 per cent” — less than the 2015 demand for “at least” 2 per cent.
That could threaten progress toward the BoJ’s sole policy target: an inflation rate of 2 per cent. In December Japan's consumer price index stood at 0.1 per cent, excluding fresh food, and 0.8 per cent excluding energy.
“The sluggish increase in nominal wages is thought to reflect low productivity growth and the strong deflationary mindset,” said Mr Nakaso. “My answer to what kind of policies are needed, is that both monetary and fiscal policies and structural reforms are indispensable.”
Mr Nakaso is likely to make similar remarks during a speech to business leaders next month in Okinawa, according to people familiar with his thinking, imploring the government to take bolder measures to unlock growth.
Takuji Okubo, managing director at Japan Macro Advisors, a research boutique, said that the government’s ‘third arrow’ record has been poor, citing a lack of true reform of the labour market, the service sector or the public pension system.
He added that the sharp sell-off in the Japanese stock market since the beginning of the year, coupled with a renewed appreciation of the yen, seems strong enough to put an end to the Abenomics boom.
“The expiry date has now come to pass,” he said.