November 15, 2012 / 5:50 AM / 7 years ago

UPDATE 2-Japan's likely next PM says BOJ may need rates below zero

* Opinion polls suggest Abe to be Japan's new PM
    * Wants more aggressive action from Bank of Japan
    * Says BOJ may need to push rates below zero to spur lending
    * BOJ hoping to hold fire on policy until new govt in place

    By Stanley White
    TOKYO, Nov 15 (Reuters) - The leader of Japan's main
opposition, seen as likely to become premier after a general
election next month, called on the central bank to push interest
rates to zero or below zero to spur lending, prompting the yen
to slide to a six-month low.
    The remark was the latest in a string of calls by Shinzo
Abe, a former prime minister and head of the Liberal Democratic
Party (LDP), pushing the central bank to go to extraordinary
lengths to revive growth in an economy slipping into its fourth
recession since 2000.
    Abe repeated that the Bank of Japan should pursue
"unlimited" easing of monetary conditions until prices rise,
signalling he would adopt a much tougher stance with the
independent central bank than the incumbent government.
    "If a commercial bank leaves reserves at the BOJ they get
0.1 percent, and this is too high when you look at what the
consumer gets from their savings account," Abe told a gathering
of media and business executives.
    "That's why money always flows back to the BOJ. I think the
BOJ will have to use zero interest rates or even use negative
interest rates to spur lending."
    After months of promising to call an election "soon", Prime
Minister Yoshihiko Noda is set to dissolve parliament's lower
house on Friday, setting up a snap vote for Dec. 16.
    However, opinion polls suggest Noda's Democratic Party of
Japan is heading for a heavy drubbing in the election, with
Abe's LDP clearly in the lead.
    After Abe's latest remarks, the yen fell to a
six-month low of more than 81 to the dollar.
    Abe's repeated calls for aggressive action by the BOJ has
put currency policy and economic management firmly on the agenda
for the election.
    It is uncertain whether Abe would maintain his tough stance
in office, but his rhetoric on monetary policy and his pledges
to help small firms who suffer from a strong yen suggest he
intends to lean on the BOJ to do more.
    The central bank is weighing new options, although it would
prefer to hold fire until there is clarity on the policy stance
of a new government early next year. 
    "What's best is for the BOJ to set an inflation target,
although I'll leave it to the experts to debate whether it
should be 2 percent or 3 percent. It must ease unlimitedly to
achieve that target. Only then would markets react," Abe said.
    Like the U.S. Federal Reserve, the BOJ has cut its policy
rates close to zero. Its main policy tool now is a 91 trillion
yen ($1.1 trillion) asset-buying and lending programme, which it
has topped up four times this year, most recently in September
and October.
    The BOJ set a 1 percent inflation target in February and
promised "powerful" policy easing to beat deflation and ease the
pain from a strong yen on the fragile, export-reliant economy.
BOJ policymakers argue that setting a higher inflation target
would be unrealistic in a country that has suffered from
deflation for more than a decade.
    Abe's rate comment appears to be taking aim at commercial
banks' current account deposits at the central bank, which
totalled 44 trillion yen a t the end of September.
    They have hovered near historically high levels for months ,
a s weak corporate loan demand meant excess cash already pumped
into the economy by the central bank just ends up back with the
institution in commercial bank deposits.
    If the central bank charges financial institutions for
parking the excess reserves with the central bank, instead of
paying interest, some of the cash could be forced back into the
    BOJ Governor Masaaki Shirakawa has strongly opposed pushing
rates down to zero, let alone seeking negative rates, on the
view that doing so would discourage banks from lending to each
other and distort market functions.
    Abe's latest proposal is thus likely to face stiff
resistance from Shirakawa. But Abe's threat matters because
Shirakawa's five-year term ends in April and the government can
choose his replacement.
    On the diplomatic front, Abe said he would do more to mend
economic ties with China but would not yield in a territorial
row with its neighbour over a group of islands known as Senkaku
in Japan and Diaoyu in China.
    He said he would increase the Japanese Coast Guard budget to
ensure that China does not create a situation where it can say
that it effectively controls the islands.
    However, Abe also touted his past efforts to improve
economic ties with China when he served as premier in 2006-2007
and said he would do more to mend economic ties in the future.
    "When I was prime minister, I visited China and helped
foster a strategic relationship based on our close economic
ties," Abe said.
    "This economic relationship is essential to both countries
and shouldn't be damaged."
    The territorial dispute prompted a boycott of some Japanese
products in China, leading to a loss of exports.
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