Has the Bank of Japan conceded its Independence ? Having a Joint Statement on monetary policy being issued by the BOJ and the Government indicates that they have....

http://ftalphaville.ft.com/2012/10/30/1237371/a-bento-box-of-pressure-at-the-boj/

A bento box of pressure at the BoJ

David Keohane | Oct 30 10:09 | Comment | 

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So the Bank of Japan basically did what what was expected of it as did the yen, which gained 0.5 per cent against the dollar as traders saw massive selling of dollar-yen going through as the Bank’s decision hit the wires.

So far, so predictable. We thought UBS’ Paul Donovan summed up the BoJ’s move fairly well:

Japan saw the Bank of Japan defy government pressure to increase the asset purchase program by JPY10tn. They increased it by JPY11tn. No doubt this will be as effective as all the previous actions which have already raised the level of the BoJ balance sheet to 32% of GDP.

But the increasing pressure that is being piled on the Bank by the government is worth drawing attention to. As well as the Bank’s attempts to shift it right back to the government.

Nomura’s FX team says this second easing decision in as many months suggests that the BoJ is becoming more aggressive, in the face of both elevated political pressures and a weakening economy. In case we missed the point, the Bank and the government have spelled it out for us. From the FT:

In a sign of strong political pressure on monetary policy makers, the announcement was accompanied by a joint statement from the government and the BoJ, declaring that both sides “share the recognition that the critical challenge for Japan’s economy is to overcome deflation as early as possible, and to return to a sustainable growth path with price stability”.

Economy minister Seiji Maehara, who sat in on the policy makers’ deliberations for a second successive meeting, described the statement as “unprecedented”.

That joint statement — in which the government said it “strongly expects” the BoJ to carry on with “powerful easing… until deflation is overcome” while the BoJ said it “strongly expects the Government to vigorously promote measures for strengthening Japan’s growth potential” — is another small sign of the structural pressures building between the Bank and the government.

And Bank of New York-Mellon’s Neil Mellor picked up on just that point (with our emphasis):

Japan’s failure to emerge from its deflationary mire has been both a tragedy and testament to the hazards of asset price booms; but it has also encouraged an entertaining verbal interplay between successive governments (yearning a constant drip of palliative policy easing) and central bank (keen to enforce its own independence.) The interplay, at MOF’s instigation, has ranged from mild insinuation (per the need for more policy easing) to outright threats to the Bank’s independence; but today’s policy decision perhaps shows that the BOJ board’s current incumbents are keen to keep the peace.

Despite inherited mantra that clarifies government has no interest in guiding the hand of its independent central bank, we have become quite accustomed to hearing officials inveigle its board members to that end [...]

Indeed, the key point here is that governor Shirakawa is no fan of quantitative stimulus for stimulus’ sake and has repeatedly decried the efficacy of such polices (as have his predecessors: in February 2001, Masaru Hayami declared that “quantitative easing … is not effective.”). In terms of failing to secure price stability, there is certainly a case for the BOJ to answer, but then, as Shirakawa has repeatedly made clear, it is unreasonable for officials to depict ever growing levels of liquidity as a panacea for an economy that is strewn, as he sees it, with profound structural flaws. Hence, whilst repeatedly stressing that the Bank is fully committed to ‘powerful monetary easing’ Shirakawa has warned that “structural reforms must be implemented within the breathing space provided by the provision of central bank liquidity … If complacency sets in because of improvements in market sentiment we could be headed for a worse outcome. Time bought can equally be usefully spent or wasted”. Nevertheless, what Shirakawa no doubt sees as the quid pro quo for the Bank’s efforts has simply failed to materialise.

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Indeed, the government has since downgraded its assessment for the third consecutive month and the edge on its ‘advice’ has become a little more pointed. Talk began to grow that the BOJ would make a further top up to its asset price program and when asked about one such story in the Sankei Shimbun, Economy minister Seiji Maehara said, “I can’t comment on individual reports”, but added that he was “very interested” in attending the bank’s policy board meeting once again. Yet on the release of a particularly weak CPI report at the end of last week, Maehara’s frustrations appeared to get the better of him: he said, “Central banks around the world are easing monetary policy. The BOJ itself set a 1% inflation goal in February but that hasn’t been achieved.”

The question that inevitably arises in the wake of today’s asset-purchase top-up therefore is to what extent government pressure, and the presence of economy minister Maehara, influenced the decision? In view of the unwavering emphasis that Shirakawa has placed upon reform (as recently as last week in fact) and upon the impotence of monetary easing in its absence, it is very difficult to believe that politics was not a factor. Yet if keeping the peace was an element in today’s decision, then Maehara and co may be forgiven for looking to leverage this ‘susceptibility’ between here and the as yet undeclared date for the next general election. Indeed, note that when Seiji Maehara emerged from today’s meeting, he said, “We have confirmed that we will make the utmost efforts to achieve the common goal with a strong sense of responsibility.” ‘Will’, ‘common goal’, ‘strong sense of responsibility’? The BOJ’s next meeting on November 19th and its aftermath could well be very interesting.