Bank of Japan ready to fight deflation and fuel economy

The Bank of Japan headquarters in Tokyo. Weak domestic demand is the root cause for deflation problem in Japan. (AFP)

Bank of Japan Deputy Governor Hirohide Yamaguchi said the central bank was ready to act to beat deflation, leaving room for more monetary easing amid a steady drumbeat of government pressure for BoJ steps to support the economy.

But Yamaguchi, a career central banker seen as close to the governor, offered few clues on what exactly the Bank of Japan might do beyond keeping interest rates near zero.

While Japan struggles with weak domestic demand, which Yamaguchi described as the root of the deflation problem, exports have been rebounding. Exports marked their third-biggest annual gain on record in January due to rising chip and auto shipments, trade data showed, allaying concerns that China's moves to rein in lending may choke off demand there and put a brake on Japan's economic recovery.

Still, this positive sign is unlikely to stop the government from pushing the BoJ to combat deflation as Prime Minister Yukio Hatoyama's cabinet eyes an upper house election expected in July.

"The BoJ can't escape the fact that prices are still declining," said David Cohen, director of Asian economic forecasting at Action Economics in Singapore.

"The BoJ would be happy to stay on hold indefinitely, but they could do something to lower short-term rates to appease the government. Price declines will narrow as long as the global economy continues to recover – but a decline is a decline."

Yamaguchi said the BoJ's key task was to boost demand and show its determination to beat deflation so the public doesn't start to think price falls will persist and hold off on spending.

"It's important to make sure corporate sentiment doesn't shrink, so that deflation doesn't trigger economic weakness and further aggravate deflation," he said in a speech to business leaders in Kagoshima, southern Japan, yesterday.

"If deemed necessary given economic and price conditions and changes in financial conditions, the BoJ is always prepared to implement appropriate measures at the appropriate time."

The government, weighed down by a huge fiscal debt, has been urging BoJ to support the fragile economy as most other major central banks mull rolling back stimulus steps.

 

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