Shinzo Abe, president of the main opposition Liberal Democratic party, delivers a speech in Tokyo
© AFP

The leading contender to become Japan’s prime minister after a general election in December has called for “unlimited” monetary policy easing to beat deflation, while signalling higher spending on public works and defence.

Shinzo Abe, head of the opposition Liberal Democratic party, also took a tough line on a bitter territorial dispute with Beijing, promising to beef up Japan’s coastguard in order to “resolutely defend” the contested Senkaku islands from Chinese challenges.

The LDP is Japan’s largest opposition party, and analysts say Mr Abe is the frontrunner to lead a new administration after a December 16 election that polls suggest will lead to heavy defeat for the ruling Democratic party.

His call for monetary easing will reinforce expectations that an LDP administration would put heavy pressure on the Bank of Japan to step up already hefty purchases of government debt as a way of encouraging inflation and weakening the yen.

Supporters hope such actions will help revive the world’s third-largest economy, but sceptics fret that undermining BoJ independence– while also increasing spending in the heavily indebted state – could pave the way to future fiscal disaster.

Mr Abe’s comments helped push the yen to a six-month low of Y80.75 to the dollar on Thursday, a slide that boosted exporters’ hopes and helped lift the Nikkei 225 index 1.9 per cent.

Mr Abe, who has previously said that a planned doubling of the 5 per cent consumption tax by 2015 should be delayed if the economy remained weak, said bolder easing and well-targeted spending would help boost Japanese growth.

He dismissed as “meaningless” recent moves by the BoJ, saying an October Y11tn increase in the central bank’s asset purchasing programme was too limited to change market sentiment and that the central bank and government should agree on an inflation target of perhaps 2 or 3 per cent.

“The time has come for a general mobilisation of all policy measures to get rid of deflation,” said Mr Abe, a former prime minister who resigned in 2007 after a setback-strewn year in office.

The BoJ should embrace “unlimited easing” and also consider cutting the 0.1 per cent overnight interest paid on banks’ deposits at the BoJ to zero or a negative rate, in order to “strengthen pressure to lend”, he said in a speech in Tokyo.

In an apparent challenge to central bank independence, Mr Abe said monetary policy change could not wait until the end of Masaaki Shirakawa’s term as BoJ governor next April.

Many in the central bank worry that politicians such as Mr Abe are too ready to use monetary easing in the form of BoJ purchases of state debt as an easy way to fund higher spending that often proves wasteful.

But Mr Abe, one of Japan’s most high-profile nationalist politicians, defended public works spending, saying Japan should be ready to pay more for such important projects as earthquake and tsunami defences.

The LDP leader also pledged to spend more on strengthening the coastguard, Japan’s first line of defence against Chinese efforts to challenge Tokyo’s control of the disputed Senkaku island group in the East China Sea. Beijing calls the islands the Diaoyu.

Ahead of the launch of new coastguard vessels, Mr Abe said older vessels could be transferred from the military under the command of ex-navy captains.

“There is no room for negotiation on the Senkaku issue. They are our nation’s inherent territory, and if we in the LDP take power we will resolutely defend the islands and their waters,” Mr Abe said.

Japan’s defence budgets had been cut in recent years, but it was now necessary to match spending to changing international circumstances, he said. “I want to send a sign by ensuring that we catch up with the certain level set by China.”

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