Japan's contraction supports policy

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Tokyo - Japan's economy unexpectedly contracted in the fourth quarter, failing to escape a mild recession and playing into the hands of a government pushing for more aggressive monetary expansion that's drawn international criticism.

While a 0.1 percent drop in output defied expectations of a slight uptick after two quarters of contraction, economists expect the economy will slowly recover this year with the help of bolder monetary and fiscal stimulus and an improving global economy.

The Bank of Japan also struck a more positive note on the economy while keeping its policy on hold after it boosted its monetary stimulus and doubled its inflation target to 2 percent a month ago.

Markets, however, have no doubt that Prime Minister Shinzo Abe will keep pushing the central bank for more, given the still fragile state of the economy. A return to rising prices also appears far off after nearly two decades of low-grade deflation.

Those expectations for further easing have sent the yen into retreat, driving it down nearly 20 percent against the dollar since November and stirring an international debate over whether Japan was effectively using aggressive money printing to steer the yen lower.

Tokyo has defended its action, saying its policies are aimed at pulling the country out of deflation, not at nudging down the yen, and Governor Masaaki Shirakawa is expected to reinforce that argument when he will attend his last Group of 20 finance leaders' meeting in Moscow this weekend.

Japan has said the Group of Seven rich nations accepted Tokyo's view when it declared in a statement on Tuesday that fiscal and monetary policies would not be directed at devaluing currencies.

But remarks from former BOJ governor Kazumasa Iwata on Thursday are likely to rekindle the international debate on Tokyo's true motives.

The yen is still overvalued from a trade perspective and the reversal of the currency's strength is essential for the Bank of Japan to achieve its 2-percent inflation target, Iwata was quoted as saying by a Japanese ruling party official.

Iwata, considered one of the leading candidates to replace Shirakawa when he leaves his post in March, said the dollar at 95 yen was appropriate. Iwata heads a private economics think-tank and now has no policymaking role.

Abe and his cabinet have the right to fill three top BOJ posts when Shirakawa and his two deputies leave on March 19 and is widely expected to pick advocates of more aggressive central bank action than the cautious outgoing chief, keeping downward pressure on the yen.

The dollar traded around 93.50 yen on Thursday after hitting a 33-month high of about 94.47 yen on Monday.

South Korea's central bank warned on Thursday that Japan's expansionary monetary policy could affect that country's future growth as a weak yen could undercut Korean exporters' competitiveness.

 

ECONOMY BOTTOMING?

As widely expected, the central bank maintained its overnight call rate target at a range of zero to 0.1 percent by a unanimous vote, and held off expanding its asset buying and lending programme, while offering a rosier view of the economy than just a month ago.

“Japan's economy appears to be bottoming out,” it said. In January the BOJ said the economy was weakening.

The world's third-largest economy contracted for the third consecutive quarter in October-December, showing Japan was taking longer to escape from a mild recession. Economists had expected a very modest expansion of 0.1 percent from the previous quarter.

However, more recent sentiment surveys and leading indicators such as machinery orders point to a gradual recovery.

“The economy is still on the recovery track, and there is a stimulus package that will help from the spring. The Bank of Japan is also likely to continue monetary easing,” said Shuji Tonouchi, senior fixed income strategist at Mitsubishi UFJ Morgan Stanley Securities.

Economics Minister Akira Amari said that while the economy was still showing some weakness, it was likely to resume moderate recovery, helped by monetary easing, stimulus spending and an expected pick-up in global growth.

On an annualised basis, the economy contracted 0.4 percent, Cabinet Office data showed on Thursday. Economists had expected a 0.5 percent annualised increase. - Reuters


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