UPDATE 3-BOJ defies easing calls, strikes back against independence risk

Tue Nov 20, 2012 4:59am EST

* BOJ keeps monetary policy steady, as widely expected
    * Dismisses calls for higher price target, negative rates
    * BOJ governor defends central bank independence
    * Markets betting on Dec easing, BOJ weighing options


    By Leika Kihara and Stanley White
    TOKYO, Nov 20 (Reuters) - The Bank of Japan held firm in the
face of political pressure to take bold steps to boost the
economy, defending its independence and dismissing the policy
prescriptions of the main opposition leader, who is expected to
become premier next month.
    It left policy unchanged, having increasing the size of an
asset buying and loans programme in September and October to 91
trillion yen ($1.1 trillion), but analysts see a good chance of
fresh stimulus in December to shore up an economy widely seen as
in recession.
    The central bank has been pushed by Shinzo Abe, leader of
the Liberal Democratic Party, to the centre of economic debate
ahead of a Dec. 16 national election that surveys show his party
would win, signalling his government would put the bank under
much greater pressure to ease policy.
    But BOJ Governor Masaaki Shirakawa dismissed many of Abe's
proposals, including the possible revision of the Bank of Japan
law, a step critics say is aimed at clipping the central bank's
independence and forcing it to print money to finance public
debt that is already double the size of Japan's economy.
    "Central bank independence is a system created upon bitter
lessons learned from the long economic and financial history in
Japan and overseas countries," Shirakawa told a news conference.
    "Any debate on revising something like the BOJ Law, which
lays the foundations of Japan's economic and financial system,
must be done carefully, spending a good amount of time."
    Abe is not alone in trying to pressure the BOJ to do more to
lift the economy. The government has been calling for action too
and in a rare move has sent Economics Minister Seiji Maehara to
the last three BOJ meetings.
    Still, Abe has called for more extreme action from the
monetary authority, including "unlimited easing", pushing rates
below zero, directly underwriting bonds issued to fund public
works, and setting an inflation target as high as 3 percent --
comments in the past week that drove the yen to a near
seven-month low against the dollar.
    "Seeking 3 percent inflation would be unrealistic and in
fact would have a big negative impact on the economy," Shirakawa
said, a rare direct response from a governor who usually chooses
his words very carefully.
    By holding off from increasing its economic stimulus, the
BOJ has given itself time to size up the policies of a new
government to be formed after the December vote for the powerful
Lower House.
    It will also allow it to assess the impact of its September
and October policy easing before its next review on Dec 19-20,
just after the election.
    "The pressure on the BOJ is so strong that I don't think
they can avoid easing next month after the results of the
election," said Yasuo Yamamoto, senior economist at Mizuho
Research Institute in Tokyo.
    "Increasing asset purchases is the most obvious option."
 
    
    MORE PRESSURE
    Japan's economy shrank 0.9 percent in the September quarter
and given headwinds to growth in the current quarter, including
a boycott of some Japanese goods in China following a
territorial row between the two countries, is widely expected to
have slipped into a recession.
    The BOJ maintained an assessment that the economy is
weakening somewhat but warned that the persistent overseas
slowdown was weighing on exports, output and business spending.
    It also offered a slightly bleaker view on the outlook,
saying the economy will "remain weak for the time being" before
resuming a moderate recovery. In October, it had said economic
growth will remain flat for the time being.
    Shirakawa was adamant the central bank would not directly
underwrite government debt because bond yields would spike and
hurt the economy.
    "No advanced country has adopted such a policy," he said.
    But feeling the political heat, the BOJ is weighing options
beyond its asset-buying programme, sources say. 
    The BOJ set a 1 percent inflation target in February and has
eased policy four times so far this year.
    Despite Shirakawa's staunch defence of the central bank's
independence, his five-year term ends in April and that of his
two deputies in March, opening the way for Abe as presumed prime
minister to get the upper hand in setting the tone of BOJ
policy.
    Under current law, the BOJ is free to set monetary policy
but the government nominates the governor, deputy governors and
board members, subject to parliament approval.
    Government pressure has frequently driven the central bank
into easing policy, particularly when a rise in the yen raised
calls for measures to ease the impact of the stronger currency
on the export-reliant economy.
    While Abe's remarks have helped lift Tokyo share prices on
expectations of bolder monetary stimulus, some analysts say his
demands are unrealistic and they doubt whether he will stick to
them once in power.
    Many economists also warn that threatening central bank
independence or forcing it to underwrite public debt could
trigger an unwelcome spike in bond yields by raising doubts in
markets about Japan's ability to keep its fiscal house in order,
especially when ratings agencies are already warning the
government is doing too little to reduce its debt.
    Prime Minister Yoshihiko Noda was quoted by Japanese media
as saying he was opposed to forcing the BOJ to underwrite public
debt or revising the central bank law, which would go against
Japan's fiscal reform efforts.
    Either way, the BOJ has a dilemma.
    "It would not be ideal for the BOJ to comply completely with
politicians' demands, but the central bank cannot ignore them
either," said Koichi Haji, chief economist at NLI Research
Institute in Tokyo.
    "So the next BOJ governor will need the ability to balance
the central bank's independence and communicate well with
politicians."
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