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Last updated: December 18, 2012 1:07 pm
Shinzo Abe, Japan’s incoming prime minister, has asked the Bank of Japan governor to set an inflation target of 2 per cent, posing a dilemma for the hawkish central bank as it heads into its two-day monthly monetary policy meeting.
Mr Abe, who led his Liberal Democratic party to an overwhelming victory in Sunday’s general election by calling for “unlimited” monetary easing and a reflationary economic policy, made the request directly to Masaaki Shirakawa, BoJ governor, who has set an inflation goal of 1 per cent and has been reluctant to ease more aggressively.
The renewed pressure by the incoming government puts Mr Shirakawa in a tight spot as Mr Abe has threatened to challenge the independence of the BoJ unless it co-operates.
“I told him that I wanted an inflation target of 2 per cent . . . and to forge a policy accord with the BoJ to achieve that objective,” Mr Abe told reporters.
The exchange came during a meeting with Mr Shirakawa on Tuesday, following the Liberal Democrats’ landslide victory. As leader of the LDP, Mr Abe will become Japan’s new prime minister when a special Diet session is convened on December 26.
If the BoJ agrees, it would be the first time such an accord has been formed between the government and central bank in Japan, and would be a dramatic policy shift by the BoJ – which in the past has resisted forming policy accords with a binding inflation target.
Mr Abe also wants to restart the Council on Economic and Fiscal Policy, a policy-setting body led by the prime minister, which he said would be “the control tower for macroeconomic policy”.
His view that more aggressive easing from the central bank is critical to reflating the Japanese economy contrasts with the BoJ’s stance that Japan already enjoys “extremely accommodative financial conditions”, as Mr Shirakawa said in a speech in November. The BoJ has said that it will aim to raise consumer prices in the medium to long term by up to 2 per cent, but that for the time being, its goal for inflation will be 1 per cent.
The government’s persistent pressure presents the central bank with the difficult task of balancing its need to stand up to government meddling and its desire to avoid any threat to its independence.
Mr Abe said on Monday the LDP’s victory reflected public support for his push for more monetary easing and has made it clear he would consider amending the Bank of Japan Act, which gives it autonomy regarding currency and monetary control, if necessary.
However, analysts do not expect the BoJ to take bold action at the policy meeting, which starts on Wednesday.
For one thing, Mr Abe’s show of public pressure on the bank makes it difficult to adopt more aggressive easing without appearing to buckle to government demands, says Hiromichi Shirakawa, chief economist at Credit Suisse in Tokyo.
Second, given that it is just days since the LDP won the election, “they don’t have enough time to come up with bold measures”, he added, suggesting that any major move is more likely to come at the January policy meeting.
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