Abe and BoJ governor talk growth

The governor of Japan’s central bank was called Tuesday to meet Shinzo Abe, prime minister, but both sides denied that they discussed the specifics of a possible interest rate rise later this month.

The scheduled meeting was the first such formal encounter between Toshihiko Fukui and Mr Abe since the latter became prime minister in September, though the two meet regularly on other committees.

Yasuhisa Shiozaki, chief cabinet secretary, said after the meeting: “They exchanged views on how to expand growth sustainably, led by the private sector in an environment of stable prices.”

Government ministers oppose another rate rise this year, but have been careful to stress their respect for central bank independence. Mr Abe’s government has prioritised nominal growth and said it hopes the central bank will co-operate in terms of monetary policy.

Hidenao Nakagawa, the powerful secretary general of the ruling Liberal Democratic Party and a confidante of Mr Abe, said Tuesday that the central bank should realise the economy was still in deflation. “I hope that an exchange of views would be made based on this understanding,” he said.

The central bank formally declared an end to deflation in July when it raised rates from zero for the first time in six years. Since then, the core consumer price index has hovered just above zero, recording a rise of just 0.1 per cent in October. Stripped of energy prices, the CPI is actually falling.

Mr Fukui, who has spoken of the need to pre-empt inflationary pressures, told reporters: “We exchanged opinions frankly on the Japanese and world economies.” BoJ officials refused to confirm or deny reports that he had briefed the prime minister on the need to steadily raise interest rates from their present ¼ per cent.

The bank’s ability to raise rates a further notch to ½ per cent when its policy board meets December 18 and 19 will depend largely on the results of the Tankan survey of business sentiment due to be released three days earlier. A strong Tankan, coupled with fairly good recent growth numbers, may give the bank the confidence to raise rates once more this calendar year.

Hiroko Ota, economy minister, who also attended the meeting, said both the government and the bank had agreed that the economic recovery remained on track. However, she said both sides noted that the improved corporate situation was feeding through more slowly than expected into higher wages and rising consumer spending.

One of the BoJ’s most likely scenarios is that robust corporate profits and a tight labour market – where there are more jobs available than job seekers – will underpin an improvement in household demand. In the event, wages have risen only very marginally. There is also evidence that households, instead of spending, have been trying to replenish savings run down in leaner times.

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