By Leika Kihara and Tetsushi Kajimoto
TOKYO Jan 23 After pressuring Japan's central
bank into overhauling monetary policy, Prime Minister Shinzo Abe
declared the change "epoch making". Next on his to-do list: find
a central bank chief more sympathetic to his views than the
In its most determined effort yet to end years of economic
stagnation, the Bank of Japan said on Tuesday it would switch to
an open-ended commitment to buying assets next year and double
its inflation target to 2 percent.
It issued a joint statement with the government promising to
reach the inflation goal "at the earliest possible time,"
drawing praise from Abe who had piled relentless pressure on the
central bank to take bolder measures to pull Japan out of
deflation and recession.
Although the scale of the measures was greater than markets
had expected, investors were disappointed the open-ended buying,
similar to a U.S. Federal Reserve policy, would not begin until
2014. That suggested no extra stimulus measures this year.
But Bernd Berg, global currency strategist at Credit Suisse,
suggested markets would soon switch their focus to the next
stage of Abe's plan and that would keep the yen on a weakening
path, a trend that has bolstered the stock market.
"The general upward move in dollar/yen will continue due to
expectations of more easing after a new BOJ governor is
appointed in April," he said.
Abe led his Liberal Democratic Party to a landslide victory
in December elections and his campaign for aggressive budget and
monetary stimulus had pushed the yen lower and sparked a stock
market rally on hopes a weaker currency would boost exports. He
hailed Tuesday's BOJ action as a game-changer.
"It is 'epoch-making' in a sense of a bold review of
monetary policy," he told reporters.
Masaaki Shirakawa's term as central bank governor ends in
just over two months. He has faced persistent pressure from
lawmakers to do more with monetary policy to lift the economy as
recent governments steadily built up massive debts, limiting the
room for fiscal expansion.
But he has resisted, insisting monetary policy alone can
only have a limited impact against the deflation that has come
to define just over a decade of economic stagnation in Japan.
Pumping unlimited amounts of cash into the banking system or
underwriting government debt, solutions pushed by critics, could
thrust Japan into a financial crisis, he has maintained.
Many analysts expect Abe to pressure the BOJ for yet more
action, especially in the run-up to upper house elections
expected in July.
The 2 percent inflation target gives him the stick he can
use to beat the BOJ for more policy easing. Japan has only
achieved 2 percent inflation in a handful of months since the
"If this means they always need to do something until
inflation rises to 2 percent, they would need to ease every
month," said Katsutoshi Inadome, fixed income strategist at
Mitsubishi UFJ Morgan Stanley Securities.
MORE ACTION EXPECTED
Abe has made clear that he wants a BOJ governor who shares
his push to reflate the economy with a hyper-easy monetary
policy combined with big fiscal spending.
Such a job would suit Toshiro Muto, a former finance
ministry official and former deputy governor at the BOJ, said
Isao Iijima, a political strategist for Abe.
Experience at the Finance Ministry's budget bureau and
strong connections in the world of finance and politics will be
vital for the next BOJ governor, Iijima said.
"That's why, if I'm to be honest, I think that a former
finance ministry official would be best," he told Reuters. "For
Kazumasa Iwata, a former government economist who served as
deputy BOJ governor until 2008, has also been mooted as a
possible Shirakawa replacement. He has consistently called for
bolder monetary stimulus to beat deflation.
The next policy options include scrapping the 0.1 percent
floor the BOJ sets for short-term interest rates to encourage
more lending and the central bank buying longer-duration bonds.
"I think the BOJ and the next governor after Shirakawa are
likely to be asked or expected to hammer out bolder measures,"
said Mitsushige Akino, executive director and chief fund manager
at Ichiyoshi Asset Management in Tokyo.
Analysts generally agree BOJ action alone won't reinflate
the economy. For its part, the cabinet this month approved about
$117 billion of spending in Japan's biggest stimulus since the
global financial crisis.
But many economists say the combined measures will provide
only a temporary boost unless the government follows through
with politically more difficult economic reforms such as
deregulating its protected farming sector.