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BOJ unlikely to act on further easing before 2017 with inflation on track

Japanese economy shrank less than expected in Q2 with boost in inventories but capex still sluggish

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Mr Sakakibara also told BT he expects the yen to move within a range of 115-120 to the dollar for the foreseeable future, with its role as "haven currency" sustaining it at current levels.

Tokyo

THE Bank of Japan is unlikely to ease monetary policy again in 2015 or in 2016, Japan's former "Mr Yen" Eisuke Sakakibara told The Business Times on Tuesday, rejecting the market view that the central bank could ease again before the end of this year. The BoJ will likely wait until 2017 before moving, if needed, he said.

Mr Sakakibara spoke as it was confirmed that Prime Minister Shinzo Abe had warded off a challenge to his position as head of the dominant Liberal Democratic Party and will remain head of government for another three years. This also ensures continuation of Mr Abe's "Abenomics policies", analysts noted.

A main plank or "arrow" of these policies has been aggressive monetary easing (alongside fiscal stimulus and structural economic reform), and with the world's third largest economy showing only halting recovery, many analysts have predicted that further monetary easing could happen as early as this year.

But Mr Sakakibara, formerly vice-finance minister for international affairs of Japan, said that the Bank of Japan will most likely opt to "keep its powder dry" until a further increase in Japan's national sales tax is due in early 2017, before deciding whether further monetary easing is needed.

Mr Sakakibara also told BT he expects the yen to move within a range of 115-120 to the dollar for the foreseeable future. Some analysts predict that the yen could fall again in anticipation of further moves by the BoJ, but Mr Sakakibara said that the yen's role as "haven currency" will sustain it at current levels.

Prime Minister Abe managed to escape a prospective challenge from former LDP executive Seiko Noda to his position as president of the LDP on Tuesday, when Ms Noda failed to gain enough sponsors to launch a challenge in the party poll.

"While creating a virtuous economic cycle, I will spread the feeling of (economic) recovery to every nook and cranny of the regions and throughout the country, completely escape deflation and create growth in a strong, future-oriented economy," Mr Abe promised supporters.

There has been speculation that the Abe administration, which came to power in December 2012, could push for further monetary easing if its economic growth targets, which some regard as over-ambitious, appear to be in danger in the run up to next year's upper house parliamentary election.

BoJ governor Haruhiko Kuroda, a former protege of Mr Sakakibara as Japan's Ministry of Finance, has also set great store by achieving the central bank's annual inflation goal of 2 per cent, and he has been assumed likely to ease monetary policy further if that target too appears to be in danger.

But Mr Sakakibara told BT he believes both Mr Abe and Mr Kuroda are broadly happy with current progress on boosting the Japanese economy and on achieving rising prices (after allowing for the impact of a continuing plunge in oil prices).

On the other hand, the Japanese central bank could be forced to react if the scheduled further rise in Japan's consumption tax from 8 per cent to 10 per cent due in April 2017 threatens to derail Japan's economic recovery or the BoJ's inflation goal, Mr Sakakibara implied.

Meanwhile, revised data on Japan's gross domestic product (GDP) showed Tuesday that the Japanese economy shrank less than expected in the second quarter of this year, thanks to a boost in inventories, although capital expenditure fell more than originally forecast.

The economy contracted at an annualised rate of 1.2 per cent in the April-June period - less than the initial estimate of a 1.6 per cent contraction, Cabinet Office data showed. The median market forecast had been a revision to a 1.8 per cent contraction.

Capital expenditure fell by 0.9 per cent from the preceding quarter, more than a preliminary 0.1 per cent drop, Reuters reported.

Japan's Minister of Economy, Trade and Industry Akira Amari said Tuesday that he wants to encourage Japanese companies to use their record high profits to increase sluggish capital expenditures.

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