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Friday, Sep. 21, 2012
Delayed recovery moves BOJ
Apparently motivated by the European Central Bank's decision to buy unlimited amounts of government bonds and the U.S. Federal Reserve's third round of quantitative easing, the Bank of Japan announced new steps for monetary easing on Wednesday.
Its main pillar is increasing the BOJ's asset purchasing fund by ¥10 trillion to ¥80 trillion to buy more long- and short-term government bonds. It will continue to buy such bonds through the end of 2013, a half year longer than originally planned.
The central bank should be praised for shedding its cautious attitude toward taking measures to pull the Japanese economy out of its long period of deflation and to put it on a path of steady recovery. Of great importance though, it must remain flexible over its monetary policy in case signs crop up that economic conditions are deteriorating.
BOJ Gov. Masaaki Shirakawa told a news conference that Japan's economic recovery, which had been expected to happen in the first half of fiscal 2012, will be delayed by about a half year.
The BOJ's move will also have the effect of easing pressure on the yen. It must have taken into consideration the business conditions affecting exporters which are suffering from the economic slowdown overseas caused by the European sovereign debt crisis. If the BOJ had not taken the latest step for monetary easing, pressure on the yen may have increased, creating even harsher business conditions for export-oriented enterprises.
If the yen strengthens again, the government may have to consider intervening in the foreign exchange market. But it must carefully determine the timing and the scale of a market intervention.
The government's monthly economic report for September revised the economic prospect downward — a downward revision for two consecutive months. The two-month downward revision is the first since the downward revision for five straight months from October 2008, immediately after the Lehman Brothers shock, through February 2009.
Prospects for the Japanese economy are not bright. Demand created by projects for reconstruction in areas devastated by the 3/11 disasters is likely to taper off. Government subsidies for those who buy eco-friendly cars are expected to end soon.
The report pointed to a weak trend in production, weak plant and equipment investment in certain sectors and lackluster consumer spending, which accounts for about 60 percent of Japan's gross domestic product.
The government should consider measures to expand demand in order to supplement the BOJ's monetary easing. If necessary, it should compile a supplementary budget for fiscal 2012 to stimulate the economy.
A big destabilizing factor for the Japanese economy is the friction with China over the Senkaku Islands. Since China is Japan's No. 1 trade partner, political leaders must make strenuous efforts to settle the issue at an early date. If the friction is prolonged, Japan's exports to China will suffer further impacting the economy.