BOJ sticks to its guns about recovery of economy

Tokyo

THE Policy Board of the Bank of Japan (BOJ) on Wednesday stuck to its view that the Japanese economy was continuing to recover moderately, despite sources close to the central bank admitting to the "shock" of seeing the world's third largest economy slide back into recession in the third quarter of this year.

BOJ Governor Haruhiko Kuroda said at a briefing: "The third-quarter gross domestic product (GDP) was negative, but the effect of the April sales tax hike is subsiding as a whole."

He was speaking after the nine-member Policy Board decided by an eight-to-one majority to leave Japan's monetary policy unchanged in the face of renewed recession.

He refused to be drawn into criticising Prime Minister Shinzo Abe's decision on Tuesday to delay a legally mandated second increase in Japan's consumption tax from October 2015 - a decision that was described by informed sources to have come as a "shock" to the central bank.

Meanwhile, financial markets reacted calmly on Wednesday to the drama in Japan from the day before - that of Mr Abe dissolving parliament to call a snap election.

The Nikkei stock average rose fractionally, while the yen slipped further to below 117 to the US dollar.

Mr Kuroda, countering suggestions that the BOJ's surprise decision on Oct 31 to power up its monetary easing had been designed to cushion against the impact of an expected increase in the sales tax, insisted that the two things were completely separate:

"Last month's monetary easing was purely aimed at ensuring that our price target would be achieved. Whether to raise the sales tax is up to the government and parliament to decide."

The central bank head also sought to play down market concerns that the delay in raising the sales tax from 8 per cent to 10 per cent in October 2015 - the hike will now not come until April 2017 - could cause investors to lose confidence in the Japanese government's ability to sustain and manage its huge debt.

"Speaking in general terms, it's important for Japan as a nation to maintain market trust in its finances," Mr Kuroda said, and added that the government had laid out a medium-term fiscal consolidation plan and set a clear target.

He added pointedly, however, that, the BOJ hoped that the government would implement the measures based on this plan so as to create a sustainable fiscal structure. "Fiscal discipline is the responsibility of the government and parliament, not that of the central bank," he said.

With its recently announced decision to step up its purchases of Japanese government bonds from around 50 trillion yen to 80 trillion yen a year, the BOJ is now purchasing all newly-isssued Japanese government debt, prompting criticisms that it is "monetising" the debt.

The BOJ has maintained that it is not "underwriting" new debt, but purchasing it from the market. Analysts say the difference is only technical and that the BOJ is setting itself up to be in a position where it may be unable to resist political pressure to bankroll the government even further.

Meanwhile, the central bank continued to put a brave face on Wednesday on its outlook for the Japanese economy and for achieving its annual consumer price inflation target of 2 per cent.

"Companies are maintaining their upbeat investment stance against the background of robust profits," Mr Kuroda said, adding that a positive mechanism of income and expenditure remained in place for both households and companies.

In a separate statement, the Policy Board acknowledged that "some weakness, particularly on the production side" remained in Japan's economy following the first hike in the consumption tax from 5 per cent to 8 per cent in April.

But it maintained the view that private consumption had remained resilient, with the employment and income situation improving steadily and "the effects of the decline in demand following the front-loaded increase have been waning on the whole".

Sources close to the BOJ admitted nevertheless that the bank's most senior policymakers had expected, along with private analysts, that the third quarter GDP would show an increase following the 7.3 per cent drop in the second quarter. Instead, output again fell by 1.6 per cent.

Still, there are expectations of a pick-up in the fourth quarter, sources said. Personal consumption had begun to recover by September and the rundown in inventories that had pushed down GDP in the third quarter pointed to production rising in the fourth, sources said.