Japan’s finance minister said he would like to see price growth of one percent and urged the Bank of Japan to cooperate in beating deflation, putting fresh pressure on the central bank for more action to support a fragile economy.
BOJ Governor Masaaki Shirakawa said the central bank was willing to cooperate, but he offered few clues on what it would do beyond keeping monetary conditions very easy.
“I personally would like to see [consumer price index] growth of around one percent, or perhaps even a little more,” Naoto Kan told a lower house budget committee.
“I think the BOJ shares the government’s view that this is a desirable policy goal,” he said, adding that how best to achieve the goal was up to the central bank to decide.
The bank appears to be ready to ease policy again in the future if market shocks, such as a sharp rise in the yen or a heavy tumble in Tokyo shares, threaten a fragile economic recovery.
Shirakawa, addressing the same budget committee as Kan, repeated that the BOJ would keep monetary conditions very easy and was always ready to provide liquidity when necessary.
“We are serious about ending deflation. It will take time and it’s not something the BOJ alone can achieve. But we will be doing all we can,” he said.
But he effectively ruled out any return to quantitative easing, a policy under which the BOJ flooded markets with excess cash from 2001 to 2006 in a bid to end an earlier bout of deflation.
Quantitative easing was effective in ensuring financial stability but it had only a limited effect in pushing up prices, Shirakawa said.
Japanese government bond yields edged up prior to Kan and Shirakawa’s comments as traders sold to make room for a re-opening sale of five-year JGBs.
“Investors would rather see a new issue being sold, but at the same time they are aware of the deflationary pressure gripping the economy as shown by yesterday’s GDP data,” said Takafumi Yamawaki, a senior rates strategist at BNP Paribas Securities.
Japan’s economy grew faster than expected in the fourth quarter due to a stimulus-fuelled rebound in domestic demand and corporate investment. But markets focused on the record three percent annual fall in the GDP deflator as a sign that the gap between supply and demand was pushing Japan deeper into deflation.
“[Deflation] is unlikely to result in immediate easing, but it will keep up the pressure on the Bank of Japan to continue with an easy monetary policy,” Yamawaki said.
Japan’s core consumer price index (CPI) fell from a year earlier for the 10th straight month in December and the so-called “core-core” CPI, the narrowest measure of consumer inflation, fell at the fastest pace on record.
Haruhiko Kuroda, the head of the Asian Development Bank, also urged the BOJ to work out a solution for persistent price falls, telling a newspaper interview that Japan was virtually alone in suffering deflation.
