As financial markets across the globe begin to regroup and find new direction, each country is seemingly taking steps to ensure the banking system does not collapse. The latest news comes out of Japan, where the governor of the Bank of Japan (BOJ) said that the bank will act decisively in the event of renewed turmoil.
While historically tight lipped on policy direction, this comment provided the strongest hint yet that the BOJ would support the economy by buying back government bonds if needed, or return to quantitative easing. BOJ Governor Masaaki Shirakawa is set to meet with Prime Minister Yukio Hatoyama this week, and a discussion on quantitative easing is on the agenda. As the government fears deflation, they will lean more on the central bank to use their policy tools.
The government has declared that Japan is in a period of deflation, and has openly criticized the BOJ’s view that annual consumer price falls will gradually ease and that another recession is unlikely. Hatoyama said the government and central bank needed to act decisively against deflation and the yen’s surge, as this hurts Japanese firms exporting their goods, by making their goods less competitive overseas. Compounding this, the yen surged last week, hurting manufacturers’ profitability, which could derail the export-driven recovery.
The Japanese government has applied increase pressure to the bank in recent weeks, as they have become increasingly concerned at the chance of another recession. The BOJ has said that there is little it can do, beyond keeping interest rates at the current low rate of 0.1 percent, in an effort to push prices up. Facing such pressure, some analysts have remarked the BOJ will eventually be pressed into quantitative easing, essentially flooding markets with extra cash to raise prices and inflation.
As an election looms in mid 2010, the nightmare scenario for the cabinet is an economic downturn, which could prompt their replacement. The line between fiscal and monetary policy is becoming blurred quickly in Japan, and who controls the monetary policy is an important segregation of duties, to avoid over tinkering to meet political agendas. As the central bank carries out policy decisions, Japan’s banks will be on notice.
