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ANZ: Easing Restrictions Lift Activity

Repeats Story Initially Transmitted at 06:02 GMT Dec 13/01:02 EST Dec 13
By Hiroshi Inoue
     TOKYO (MNI) - The Bank of Japan board will maintain the current pace of
monetary easing at its two-day policy meeting ending on Dec. 21 as it engages in
a prolonged battle to push up inflation, MNI understands.
     The economy has continued expanding moderately as the board predicted at
its last meeting on Oct. 30-31 and a moderate economic expansion is likely to
continue based on balanced domestic and overseas demand, BOJ officials believe.
     The market is already looking ahead to the BOJ's Jan. 22-23 meeting, when
the board will update its growth and inflation outlook in its quarterly Outlook
Report. This is the last report before BOJ Governor Haruhiko Kuroda's five-year
term ends on April 8. In addition, the five-year terms of two current deputy
governors end on March 19.
     After nearly five years of the BOJ's Quantitative and Qualitative Easing
program (QQE), the year-on-year rise in the core consumer price index (excluding
fresh food) remains below 1%, far from the central bank's 2% inflation target.
     The BOJ focus remains on whether more companies will raise wages and retail
prices in the coming months, pushing up consumer inflation. Many firms are
absorbing higher materials and labor costs but some are facing the limit of
their ability to raise productivity to offset these costs, BOJ officials
     BOJ economists think labor productivity is rising, which should increase
upward pressure on wages. To monitor whether this is happening, they will look
closely at corporate inflation expectations data to be released Monday as part
of the bank's December Tankan business survey. Tankan data on business sentiment
and capital expenditure plans are due on Friday.
     In the September Tankan survey, companies on average revised down their
expectations for the CPI one year ahead from the June survey, but left their
inflation outlooks for three and five years ahead unchanged.
     Inflation has been slow to rise despite the sustained, modest economic
recovery but BOJ officials believe the momentum toward 2% inflation is being
     The BOJ policy statement to be released after the Dec. 20-21 meeting won't
show any detailed risk assessment but comments from board members indicate they
are maintaining the central bank's view presented in the last Outlook Report
issued on Oct. 31 that risks to growth are largely balanced while those to
inflation are skewed to the downside.
     The board shares the view that both advanced and emerging economies are
likely to continue growing in a well-balanced manner and that the global economy
will maintain solid growth.
     Since there is no large immediate risk to Japan's economy, some BOJ
officials believe the only risk facing monetary policy is if policymakers become
"overly optimistic" at this point.
     Some board members have pointed to potential side-effects of the easy
policy but the official line is that no serious side-effects have been observed.
     In his speech at the University of Zurich last month, BOJ Governor Haruhiko
Kuroda mentioned a "reversal rate," referring to the risk that an excessive drop
in interest rates would impair financial institutions' intermediation function.
Under these circumstances, "the effects of monetary easing on the economy
reverses and becomes contractionary," he said.
     His comments triggered speculation in financial markets that the BOJ was
considering beginning to unwind its large-scale monetary stimulus or, at the
very least, that Kuroda had no intention of conducting any further monetary
     BOJ officials deny that the speech had any policy implications and they
stress that it was delivered to an academic audience.
--MNI Tokyo Bureau; tel: +81 90-2175-0040; email:
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--MNI BEIJING Bureau; +1 202-371-2121; email: