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By Stanley White
TOKYO (Reuters) - The leader of Japan's main opposition, seen as likely to become premier after a general election next month, called on the central bank to push interest rates to zero or below zero to spur lending, prompting the yen to slide to a six-month low.
The remark was the latest in a string of calls by Shinzo Abe, a former prime minister and head of the Liberal Democratic Party (LDP), pushing the central bank to go to extraordinary lengths to revive growth in an economy slipping into its fourth recession since 2000.
Abe repeated that the Bank of Japan should pursue "unlimited" easing of monetary conditions until prices rise, signalling he would adopt a much tougher stance with the independent central bank than the incumbent government.
"If a commercial bank leaves reserves at the BOJ they get 0.1 percent, and this is too high when you look at what the consumer gets from their savings account," Abe told a gathering of media and business executives.
"That's why money always flows back to the BOJ. I think the BOJ will have to use zero interest rates or even use negative interest rates to spur lending."
After months of promising to call an election "soon", Prime Minister Yoshihiko Noda is set to dissolve parliament's lower house on Friday, setting up a snap vote for December 16.
However, opinion polls suggest Noda's Democratic Party of Japan is heading for a heavy drubbing in the election, with Abe's LDP clearly in the lead.
After Abe's latest remarks, the yen fell to a six-month low of more than 81 to the dollar.
Abe's repeated calls for aggressive action by the BOJ has put currency policy and economic management firmly on the agenda for the election.
It is uncertain whether Abe would maintain his tough stance in office, but his rhetoric on monetary policy and his pledges to help small firms who suffer from a strong yen suggest he intends to lean on the BOJ to do more.
The central bank is weighing new options, although it would prefer to hold fire until there is clarity on the policy stance of a new government early next year.
"What's best is for the BOJ to set an inflation target, although I'll leave it to the experts to debate whether it should be 2 percent or 3 percent. It must ease unlimitedly to achieve that target. Only then would markets react," Abe said.
Like the U.S. Federal Reserve, the BOJ has cut its policy rates close to zero. Its main policy tool now is a 91 trillion yen ($1.1 trillion) asset-buying and lending programme, which it has topped up four times this year, most recently in September and October.
The BOJ set a 1 percent inflation target in February and promised "powerful" policy easing to beat deflation and ease the pain from a strong yen on the fragile, export-reliant economy. BOJ policymakers argue that setting a higher inflation target would be unrealistic in a country that has suffered from deflation for more than a decade.
Abe's rate comment appears to be taking aim at commercial banks' current account deposits at the central bank, which totalled 44 trillion yen at the end of September.
They have hovered near historically high levels for months, as weak corporate loan demand meant excess cash already pumped into the economy by the central bank just ends up back with the institution in commercial bank deposits.
If the central bank charges financial institutions for parking the excess reserves with the central bank, instead of paying interest, some of the cash could be forced back into the economy.
BOJ Governor Masaaki Shirakawa has strongly opposed pushing rates down to zero, let alone seeking negative rates, on the view that doing so would discourage banks from lending to each other and distort market functions.
Abe's latest proposal is thus likely to face stiff resistance from Shirakawa. But Abe's threat matters because Shirakawa's five-year term ends in April and the government can choose his replacement.
TOUGH ON CHINA
On the diplomatic front, Abe said he would do more to mend economic ties with China but would not yield in a territorial row with its neighbour over a group of islands known as Senkaku in Japan and Diaoyu in China.
He said he would increase the Japanese Coast Guard budget to ensure that China does not create a situation where it can say that it effectively controls the islands.
However, Abe also touted his past efforts to improve economic ties with China when he served as premier in 2006-2007 and said he would do more to mend economic ties in the future.
"When I was prime minister, I visited China and helped foster a strategic relationship based on our close economic ties," Abe said.
"This economic relationship is essential to both countries and shouldn't be damaged."
The territorial dispute prompted a boycott of some Japanese products in China, leading to a loss of exports.
(Additional reporting by Leika Kihara; Editing by Michael Watson and Neil Fullick)
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