TOKYO: Japanese Prime Minister Shinzo Abe made his biggest push yet to make jobs growth part of the Bank of Japan’s mandate as his government approved $117 billion of spending to revive the economy in the biggest stimulus since the financial crisis.
Under intense pressure from Abe, the BOJ will likely adopt a 2 percent inflation target at its Jan. 21-22 rate review, double its current goal, and consider easing monetary policy again, most likely by increasing government debt and asset purchases, sources told Reuters this week.
Japan’s current account, which is normally in surplus, swung to a rare and hefty deficit in November, which helped push the yen to a 2-1/2 year low against the dollar and highlighted the need to support the economy as exports weaken.
Abe’s recipe to jolt Japan from years of deflation is big fiscal spending and central bank purchases of government debt, but there are risks as the country’s debt burden is already the worst among major economies.
“Bold monetary easing is essential in beating deflation and a strong yen,” Abe said as he unveiled direct spending worth 10.3 trillion yen ($117 billion) on public works, incentives for corporate investment and financial aid for small firms.
Taken together with spending by local governments and private-sector firms, the size of the entire package was 20.2 trillion yen, according to government officials.
The government expects the stimulus to raise real economic growth by 2 percentage points and create 600,000 jobs.
Abe has made aggressive monetary policy to end almost 20 years of deflation a top priority after his Liberal Democratic Party (LDP) won elections last month.
In an interview with the Nikkei newspaper on Friday, he repeated his calls for the BOJ to add job growth to its mandate like the US Federal Reserve, which is the only major central bank that commits to boosting job growth as well as keeping inflation in check.
The BOJ is strongly opposed to adding job growth to its mandate for fear of binding its hands on future policy, although it may accept a phrase in the statement that creating more jobs would be a shared objective with the government, said sources with knowledge of the negotiations on the statement.
“I think the BOJ can respond to Abe’s calls on employment within the existing framework of the BOJ Law by placing a little more emphasis on employment in its forecasts,” said Hiroshi Miyazaki, chief economist at Shinkin Asset Management in Tokyo.
“But when it comes to inflation, it’s really hard to get consumer prices to rise 2 percent in the short term. Prices lag the economy by about a year and we’ve been in recession since last year.”
The joint statement, now being negotiated by government and BOJ officials, will likely include 2 percent inflation as the bank’s new target and a pledge to continue with aggressive monetary easing to beat deflation, the sources said.
But it is unlikely to set a specific deadline for achieving
the target and leave the central bank some flexibility in guiding monetary policy. The key would be how to phrase the commitment as Abe told the Nikkei that such a target would be meaningless if it had too long a timeframe.
The BOJ also hopes to stress in the statement the inflation target is a long-term goal and won’t be achieved unless monetary easing steps are accompanied by government efforts to boost growth potential such as deregulation, the sources said.
The public seems to agree that ending deflation will not be easy.
A quarterly survey by the BOJ showed on Friday that 53 percent of the respondents expect prices to rise a year from now, down from 62 percent in the September survey. Of the total, 38 percent expect prices to remain largely unchanged a year from now, while nearly 8 percent see them falling.
Abe’s calls for bolder BOJ easing helped the yen hit 89.35 per dollar on Friday, its weakest since 2010, and briefly pushed down the 5-year government bond yield to 0.150 percent, within sight of a record low hit in 2003.
But bond yields rose at the long end of the curve as the government’s plans for more public works spending meant it will sell around 5 trillion yen more bonds than originally planned for the current fiscal year.
The BOJ will remain vulnerable to pressure from Abe as his government has the right to choose a successor to BOJ Governor Masaaki Shirakawa when his term expires in April.
Kazumasa Iwata, a former BOJ deputy governor seen as a strong candidate to head the bank, said that while the central bank shouldn’t be asked to achieve its price target by a certain deadline, it should focus more on job growth.
“With flexible inflation targeting, one role of monetary policy could be to limit how much prices and the jobless rate deviate from a pre-determined level,” Iwata, who now heads a private think tank, told a seminar on Friday.
“Looking at Japan, I don’t think wages will improve much unless the jobless rate falls to around 3.5 percent.”
The unemployment rate in December was 4.1 percent.
Haruhiko Kuroda, president of the Asian Development Bank also seen as a possible BOJ governor candidate, was more blunt.
“It’s important to commit to an unlimited amount of easing, not a few trillion yen here and a few trillion yen there.”