Q+A-How will new Japan finmin affect BOJ policy?

Thu Jan 7, 2010 5:19am EST

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(For more stories on the Japanese economy, click [ID:nECONJP])

By Leika Kihara

TOKYO Jan 7 (Reuters) - Japan's new finance minister, Naoto Kan, said he planned to work with the Bank of Japan to prevent a double-dip recession, suggesting the harsh central bank critic will keep pressuring the BOJ to loosen monetary policy further.

The 63-year-old Kan has succeeded Hirohisa Fujii, 77, who has stepped down for health reasons. Kan retains his post as economics minister, meaning he will continue to head the Cabinet Office.

While the BOJ is independent by law, the government wields some influence over monetary policy as it picks candidates for the BOJ's policy board including its governor. The Finance Ministry and Cabinet Office also send representatives to the BOJ's policy-setting meetings. These representatives cannot vote but they can voice their views and request delays in votes.

HOW HAS KAN DEALT WITH THE BOJ SO FAR?

Kan has been one of the most vocal cabinet critics of the BOJ, blasting it for taking too rosy a view on the economy when it upgraded its assessment in November.

He has never explicitly demanded specific action from the BOJ but he has pressured it to acknowledge deflation and do more to help the economy, which he thinks faces the risk of another recession.

Kan was in charge when the government declared in November that Japan was in deflation. Ten days later, the BOJ used the same term, marking an about-face for the central bank, which until then had avoided the word, arguing that its definition was vague.

On Dec. 1, a few days after Kan said the government and the BOJ would act together to stem yen rises, the BOJ held an emergency rate review and eased policy with a new scheme offering banks more short-term funds. [ID:nT374859] The move drove the yen away from its 14-year high against the dollar hit in November.

WHAT WOULD KAN AS FINANCE MINISTER MEAN FOR BOJ?

As Kan was already heading the Cabinet Office he is not a new face for the central bank.

Some analysts say the change won't matter much as regardless of who heads the finance ministry, the fundamental problems it faces -- Japan's huge public debt and a weak economy -- and the lack of resources to deal with them, won't change.

But Kan is seen as more interventionist and vocal on monetary policy than his predecessor, who mostly took a hands-off approach. Having him as head of the powerful ministry may mean pressure will grow for more BOJ action to support the economy.

In his first public appearance in his new post, Kan said he would work with the BOJ in keeping the yen weak for the sake of Japan's export-driven economy, repeating what he had said a few days before the BOJ's emergency meeting on Dec. 1.

When the BOJ made clear it wouldn't tolerate zero inflation, let alone deflation, in mid-December, Kan said the central bank had effectively adopted an inflation target and urged it to act to meet that goal.

Some BOJ officials, however, say such criticism doesn't necessarily reflect Kan's personal belief or policy stance. Rather, he was acting as a mouthpiece for the government and therefore a bridge between it and the BOJ, they say.

If so, Kan may be easier to work with than his predecessor although overall, BOJ officials are bracing for more government pressure for monetary easing.

HOW WILL THE BOJ RESPOND?

Kan has been more pessimistic about the economic outlook than other cabinet ministers and so may be faster in calling for BOJ action to support the fragile recovery.

The BOJ may be pressured to increase its government bond purchases if yields shoot up on concerns Japan will sell more bonds to spend its way out of economic weakness.

BOJ officials are aware of the risk of this happening and say an increase in the bank's outright government bond purchases from the current 21.6 trillion yen ($234 billion) per year cannot be ruled out.

If the economy undershoots its forecasts, the BOJ may also consider pumping more liquidity into the market by extending the length or size of the new market operation adopted on Dec. 1.

While such measures may not give an immediate boost to the economy, they may help boost sentiment and encourage companies and households to spend more, BOJ officials say. (Editing by Hugh Lawson)

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