lan Wheatley London
“HISTORIC” is an overused word. But if the Bank of Japan (BoJ) 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, the chief economist at Oppenheimer Funds 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 will end on Thursday, the central bank was likely to start open-ended asset purchases immediately, rather than from next year, said officials familiar with the bank’s thinking.
The BoJ would also probably extend the maturity of the bonds it bought and sold, and set a new policy target focusing on the size of its balance sheet.
Japan badly needs nominal gross domestic product (GDP) 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 labour. 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, which is something Japan has shown little appetite for.
Even if his strategy does work, there could be a backlash from Japan’s growing legions of pensioners, who have no interest in seeing their wealth and fixed incomes eroded by inflation.
All told, the stakes for Japan were arguably greater than at any point in the past 50 years, said James Malcolm, a foreign exchange strategist with Deutsche Bank in London.
While Kuroda has US Federal Reserve chairman Ben Bernanke’s template for quantitative easing to follow, the BoJ chief’s commitment to end deflation “at any cost” has echoes of European Central Bank (ECB) president Mario Draghi’s vow to “do whatever it takes” to preserve the euro.
The single currency has had another near-death experience over the terms of Cyprus’s rescue.
Draghi is sure to be quizzed about the deal’s implications for the euro zone at a news conference following an ECB policy meeting on Thursday.
In exchange for a bailout loan, the International Monetary Fund, the European Commission and the ECB wiped out Cyprus’s senior bond holders and imposed a levy on big depositors at the island’s two largest banks. Temporary capital controls are also in place.
Pessimists fear these unprecedented steps could prove contagious, touching off a deposit flight from weak banks in more important economies, which could cause the euro zone to disintegrate.
Optimists retort that the ECB has slung a safety net under the euro by promising to buy struggling governments’ bonds as a last resort.
Where both camps agree is that Cyprus’s crisis will deal a fresh blow to confidence and further delay the euro zone’s recovery. – Reuters