UPDATE 2-Japan's likely next PM keeps up calls for bold BOJ stimulus

Tue Nov 27, 2012 2:13am EST

* BOJ, govt should set 2 pct inflation target - Abe
    * Adds BOJ must be held accountable for job growth too
    * BOJ independence protected as long as it can decide on
means
    * Adds Japan can't fix fiscal health unless deflation ends


    By Leika Kihara
    TOKYO, Nov 27 (Reuters) - Japan's opposition leader and
likely next premier, Shinzo Abe, kept up his rhetoric on Tuesday
for bolder monetary and fiscal stimulus, warning that the
country cannot restore fiscal health unless it beats deflation.
    Abe, the leader of the Liberal Democratic Party (LDP) that
is tipped to win next month's election, stressed that overcoming
deflation was crucial not just to revive growth but also to fix
Japan's fiscal health.
    Tax revenues would not increase, he said, unless companies
and households started spending more in the belief that prices
would rise in the future.
    Abe also said that if the government were to set a policy
target for the Bank of Japan it would not necessarily be
infringing on the central bank's independence, as long as it
retained the freedom to decide how to do it.
    "The government and the BOJ should achieve a policy accord
and discuss an inflation target to pursue bold monetary easing.
The 1 percent 'goal' already announced by the bank won't do. It
must instead be a 'target' of 2 percent," Abe told a symposium
debating Japan's growth strategy.
    "Most central banks in the world, except for that of Japan,
set policy targets with the government or in response to
requests from the government," he said, reiterating his view
that the BOJ should be held accountable not just for achieving
price stability but for boosting job growth.
    Abe, a former prime minister chosen in September to again
head the LDP, has called for the BOJ to pursue "unlimited"
monetary easing, set a 2 percent inflation target and have it
share a common goal with the government possibly by revising a
law guaranteeing its independence.
    The demands have pushed down the yen on expectations that
more aggressive policy loosening may be forthcoming if Abe wins
the election.
    
    LONGER EASING NEEDED
    Monetary policy has become among the key topics of debate
ahead of the election with Yoshihiko Noda, incumbent prime
minister and head of the ruling Democratic Party, criticising
Abe's demands as extreme steps that could backfire and trigger a
sudden spike in bond yields.
    The BOJ, which set a 1 percent inflation target in February
and eased monetary policy via an increase in asset purchases
four times this year, has been criticised for failing to beat
deflation that has plagued Japan for more than a decade.
    Its governor, Masaaki Shirakawa, has turned down most of
Abe's demands as unrealistic. In an effort to shift the debate
away from monetary policy, he repeated on Monday that monetary
easing alone cannot beat deflation and called on the government
to do its part by pursuing fiscal reform and deregulation to
boost domestic investment. 
    Abe said the problem was that the central bank withdrew
stimulus programmes too early.
    "It takes two to three years to create inflation
expectations, so (the BOJ) needs to show its determination to
keep (ultra-loose policy) in place for that long a time. Only
then would inflation expectations heighten," he said.
    The LDP, once in power, will also boost fiscal spending
mainly to build new roads and bridges that can weather natural
disasters like last year's devastating earthquake which,
together with aggressive monetary stimulus, will help eradicate
deflation, Abe said.
    "What's important is to shift from deflation to inflation.
Japan won't be able to restore fiscal health as long as it's in
deflation," he said.
    Japan's economy shrank 0.9 percent in the quarter to
September and analysts forecast another contraction in the final
three months of this year, a sign it was slipping into recession
as weak global demand and the fallout from a territorial row
with China hit the export-reliant economy.
    But the government has little room to boost fiscal spending
since it is saddled with public debt twice the size of its
economy, the biggest among major industrialised nations.
    Some analysts, however, complain that monetary or fiscal
stimulus only buys time for Japan to pursue much-needed reforms
to boost its growth potential such as opening up the country to
outside competition.
    "I'm very worried. Japan's economy has become addicted to
fiscal and monetary morphine," Ryutaro Kono, chief Japan
economist at BNP Paribas, told the seminar after Abe spoke.
    "Deflation is only a consequence of low growth," he added,
criticising politicians for leaning on fiscal and monetary
policy and delaying much-needed structural reforms.
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