Last updated: December 23, 2012 3:06 pm

Japan’s Abe issues ultimatum to BoJ

Shinzo Abe, Japan’s prime-minister-in-waiting, has threatened to revise the law governing the Bank of Japan if it refuses to introduce a 2 per cent inflation target at its January policy meeting.

The comments by Mr Abe, whose Liberal Democratic party won a landslide victory in this month’s general election, highlight his determination to push the BoJ to adopt a more aggressive monetary policy in an effort to end chronic deflation and boost economic growth. It marks the most explicit challenge yet from Mr Abe to the independence the central bank has enjoyed since 1998 in setting monetary policy.

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In an appearance on Fuji TV on Sunday, Mr Abe, who this week is set to become Japan’s seventh prime minister in just more than six years, said a new approach was essential to defeating the deflation dogging the economy.

“It has to be different from the traditional methods – the traditional methods have not been able to defeat deflation for more than a decade. That’s no good,” he said.

Mr Abe, whose first stint as prime minister in 2006-07 ended amid ill health, scandal and policy failure, said he had explained to Masaaki Shirakawa, BoJ governor, the importance of replacing the bank’s current “goal” of achieving a 1 per cent annual increase in consumer prices with a “target” of a two per cent rise.

At a monetary policy meeting last week, the BoJ board announced an expansion of its current asset buying programme but stopped short of bowing to Mr Abe’s target demand, saying only that it would discuss the issue at its next gathering, in late January.

“If, regrettably, that does not happen, then we will revise the BoJ law and put together an inflation targeting accord [between the government and central bank],” Mr Abe said . on Sunday.

As well as adopting the new inflation target, the BoJ should also take on responsibility for promoting employment, he said.

Mr Abe’s comments will cheer those who believe that excessive central bank caution and toleration of deflation has unnecessarily hobbled the world’s third-largest economy as it struggles to recover from a brutal 2008-09 downturn.

However, it will further fuel the concerns of others who believe that deflation and low growth are symptoms of structural problems such as a declining workforce and over-regulated business environment.

Sceptics say that by forcing the BoJ to print money to fund a huge planned programme of public works spending, Mr Abe is putting at risk long-term faith in the solvency of a state that already has gross debt equivalent to more than 200 per cent of national gross domestic product.

Mr Shirakawa, the BoJ governor, has warned that “monetising” government debt could undermine confidence in Japan’s fiscal discipline, resulting in higher interest rates that would make it much harder to finance the deficit.

However, Mr Abe has already made clear that Mr Shirakawa will be replaced when his current term as governor ends in April and that his successor will be a candidate more willing to push aggressive easing. “We want to have someone who supports our thinking,” he said on Sunday.

Under the 1997 law governing the BoJ, which was implemented in April 1998, the central bank is tasked with preserving “price stability” but is able to decide itself how this should be defined and achieved.

The law requires that the BoJ’s autonomy in setting monetary policy “be respected”, although it also requires the central bank to maintain close contact with the government to ensure that its work is compatible with national economic policy.

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