Japan’s central bank pledges new stimulus to combat deflation
WASHINGTON — In unveiling a new stimulus plan, Japan’s central bank for the first time set an ambitious inflation target aimed at breaking the nation out of its long deflationary trap and economic stagnation.
But many analysts and investors were disappointed with Tuesday’s action.
They said the moves by the Bank of Japan, in response to relentless nagging by Japan’s new prime minister to be more aggressive, fell far short of what was needed to put the world’s third-largest economy on a path of sustained growth — offering little hope that Japan would provide a boost to the fragile global economy any time soon.
Japan’s economy shrank in the third quarter amid weakening exports and consumer spending, and economists said it was likely to report a contraction for the fourth quarter, technically putting it in recession.
Deflation has long been a big part of Japan’s economic woes. The trend of falling prices undermines growth by sapping consumers’ spending and business profits, hurting jobs, wages and investment.
The country has been in a mild deflation in the last year. To combat that, the Bank of Japan adopted a 2% inflation target — double its previously stated goal of 1% and in line with other central banks in advanced economies, including the Federal Reserve in the U.S.
And much like the Fed, Japan’s central bank pledged to pump more money into the financial system by buying government bonds indefinitely every month in a bid to meet its target.
Although the Fed’s focus has been on bringing down America’s stubbornly high unemployment rate, Japan’s central bank is aiming to spur more consumer spending, in part by trying to create expectations that prices will rise, a strategy that not everyone agrees will work.
Japan’s new prime minister, Shinzo Abe, praised the central bank’s action, calling it “bold” and “epoch-making.” The Bank of Japan’s statement was issued jointly with Abe’s government, which for its part pledged “all possible decisive policy actions” to grow the economy.
But the announcement was met with widespread skepticism from financial markets and experts. For one thing, the central bank’s stepped-up buying of government bonds would amount to about 13 trillion yen a month, or about $147 billion, not nearly as much as analysts were expecting.
Furthermore, the Bank of Japan said it would not begin such purchases until early 2014, a delay that puzzled experts.
Takeo Hoshi, a finance professor at Stanford University, said it wasn’t clear exactly why the central bank was delaying the expanded stimulus until next year. But he noted that the Bank of Japan is concerned about providing artificial support to unhealthy businesses and fostering undisciplined fiscal spending by buying government bonds and keeping interest rates low.
Hoshi said his bigger concern with Tuesday’s joint statement was the lack of concrete steps that Abe’s government said it would take to address long-running needs in the Japanese economy, such as deregulation and policies to strengthen competitiveness.
“The fundamental problem is that Japan’s potential growth rate has declined over the last 20 years, and Japan hasn’t done enough structural reforms to change that,” said Hoshi, who directs the Japanese program at Stanford’s Asia-Pacific Research Center.
The new 2% inflation-targeting strategy by itself won’t drive more consumer spending, said Japanese economics expert Richard Katz, because “people keep expecting inflation and it never happens.”
“When they expect more inflation, it actually causes them to spend less because prices go up, but people don’t think wages will go up,” said Katz, chief editor of the Oriental Economist Report, a monthly newsletter that specializes in Japan and U.S.-Japan relations.
The answer to Japan’s economic problems, Katz said, was to provide stronger monetary stimulus and more efficient fiscal spending, along with a series of structural reforms that would enable Japan to become more productive in the face of a shrinking workforce and a population that is aging and saving less.
The Bank of Japan’s action also drew criticism from Jens Weidmann, president of Germany’s Bundesbank. He warned of government infringement in central bank authority and a resulting “politicized exchange rate” that could lead to currency wars as countries look to bolster economic growth through exports.
Japan, for decades an export powerhouse with perennial surpluses, has been running a trade deficit for the last two years. As prime minister, Abe has sought to devalue Japanese currency to help the country’s export industries. The central bank’s pledge to buy more bonds could help put further downward pressure on the yen.
Still, experts don’t think that the yen will fall much further. Even if it dropped 10%, they said, it would probably have only a minor effect on the overall economy.
“I don’t think trade surpluses will come back for Japan,” Stanford’s Hoshi said. “They need to come up with a new growth model.”
