Politics Drive BOJ Where It Doesn’t Want to Go
By TATSUO ITO And GEORGE NISHIYAMA
With political pressure apparently overcoming its reluctance to be seen as financing the nation’s budget deficit, the Bank of Japan has drastically increased its purchases of government bonds.
The central bank, despite its concerns that being perceived as monetizing public debt could bring an unwanted jump in interest rates, decided Friday to buy an additional ¥10 trillion ($124.6 billion) in government bonds under its asset-purchase program. That matches the ¥10 trillion increase in February and will bring the central bank’s overall JGB holdings by the end of the year to ¥90 trillion—more than twice the ¥44 trillion yen in new bonds the government will issue to finance this year’s budget.
“The BOJ’s policy is steadily getting closer to debt financing,” said Yuichi Kodama, chief economist at Meiji Yasuda Life Insurance. Some BOJ watchers said it wasn’t just size of additional purchases that triggered monetization alarms. At its Friday policy-board meeting the bank also decided to add longer-term debt to its mix, buying bonds with maturities up to three years, from two years previously. The BOJ has been reluctant to do that specifically out of concerns that it would be interpreted as financing the budget deficit.
Still, BOJ Gov. Masaaki Shirakawa repeatedly denied Friday that the action represented monetization.
“We do not at all intend to finance the debt,” he told a press conference, saying that the extending the maturity was aimed at reducing longer-term interest rates. But analysts said strong political pressure and market expectations drove the decision, increasing concerns that the bank will continue to be swayed by such forces.
“They know they live in a world where they have to deal with politicians,” said person with knowledge of the BOJ’s thinking, explaining that the bank’s policy makers believe they can’t base decisions entirely on the state of the economy.
Lawmakers seem unlikely to ease the pressure any time soon. Both supporters and opponents of Prime Minister Yoshihiko Noda’s contentious plan to raise the 5% consumption tax to 8% in 2014 and then to 10% in 2015 have turned up the heat on the BOJ to end deflation with ever-easier monetary policy. The bank in February set a goal of lifting annual inflation to 1%.
“To exit from deflation, we expect the BOJ to continue with appropriate and bold monetary-policy conduct, while coordinating closely with the government,” Mr. Noda told The Wall Street Journal following Friday’s BOJ decision. For the prime minister, an end to deflation is needed to answer one argument against the tax increase—that an economy in which prices are falling cannot stand the additional tax burden.
For opponents of the tax increase, notably lawmakers who fear that voting for the unpopular plan would cost them their seats, the hope is that further easing by the BOJ might stimulate growth and make the tax increase unnecessary.
Mr. Noda has staked his political career on the sales tax bill—pitched as a way to rein in ballooning government debt, already twice the size of Japan’s annual economic output—but faces an uphill battle in a divided parliament and with strong opposition even within his ruling party.
The BOJ Friday took a rare swipe at the government, saying in a statement following the decision that if the bank’s easy-money policy is to be effective, “it is extremely important to maintain credibility in fiscal sustainability.” According to others familiar with its thinking, the central bank is concerned that continued bond purchases, if not accompanied by an overhaul of government finances, could hurt confidence in Japan’s fiscal policy and lead to a jump in long-term interest rates.
Mr. Shirakawa noted Friday that the bank is effectively nearing a self-imposed limit on its government-debt holdings: They can’t exceed the total value of bank notes in circulation, which currently stands at around ¥80 trillion yen. Bonds purchased through the asset-purchase program aren’t counted—but if they were, the total would likely exceed the bank notes, Mr. Shirakawa said.
With the additional ¥10 trillion, the BOJ is set to buy a total of ¥24 trillion of JGBs by the end of the year. Together with about ¥65 trillion yen of bonds purchased through its regular monthly operations, the total would near ¥90 trillion.
At Friday’s news conference, Mr. Shirakawa even asked the media to keep the BOJ in line.
“The BOJ will not finance the government debt,” he said. “I want you to trust my words. I’d like you to watch over our action.”
But to some, the declaration comes too late.
“I believe much of the world has discredited Japan and likely the BOJ over the past decade,” said Steve Shafer, chief investment officer of a global macro hedge fund Covenant Global Investors. “This reduces any credibility they may have had to sway the market for any enduring period of time.”
—Megumi Fujikawa contributed to this article.
Write to Tatsuo Ito at tatsuo.ito@dowjones.com and George Nishiyama at george.nishiyama@dowjones.com
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