TOKYO, June 15 - The Bank of Japan (BOJ) kept its already super-loose monetary policy unchanged on Friday but immediately faced fresh political demands to do more to stop the world's second-largest economy from tumbling into recession.
With short-term interest rates already at zero, the BOJ has forcefully argued that it can do no more to prop up growth.
But a leading lawmaker, speaking shortly after the central bank's nine-member Policy Board voted unanimously to stay put, said the BOJ was providing too little support for the economy. "It's insufficient. Further monetary easing is needed," Hideyuki Aizawa, a veteran member of the dominant Liberal Democratic Party and head of its tax panel, told .
Finance Minister Masajuro Shiokawa, who had earlier made a thinly veiled call for an easier policy, denied a rift had opened up between the government and the independent central bank. "They made the decision, and that's fine. If there is a need (for further action), they'll decide," Shiokawa told reporters.
Still, Economics Minister Heizo Takenaka, who attended the two-day meeting, made it clear the government was counting on the bank to ease further. He said he had told the board he hoped the BOJ would do whatever was necessary to help the economy.
The drumbeat of political demands is an echo of the pressure the BOJ came under at the start of the year when the economy suddenly took a turn for the worse.
After insisting it saw no need to act, the bank rapidly eased policy on three occasions, culminating in a radical regime shift on March 19 when it promised to flood the money markets with cash and keep interest rates at virtually zero until Japan's pernicious deflation ended.
PRINTING MONEY
Many economists see a similar pattern unfolding now and expect the BOJ, despite its protestations, to agree in the coming months to start printing more money. "There is no doubt that it (easing) will happen, the only question is the timing," said Yasushi Okada, chief economist at Credit Suisse First Boston.
Okada speculated that the BOJ was keeping its powder dry for a first meeting on June 30 between U.S. President George W. Bush and Japan's wildly popular new prime minister, Junichiro Koizumi. Bush's chief economics adviser, Lawrence Lindsey, on Friday renewed Washington's demands that Tokyo purge its banks of bad loans that are crippling fresh credit creation and pull the plug on unviable companies.
Koizumi has pledged to do just that, but politicians are fretting that the ensuing wave of bankruptcies will send unemployment soaring and want the BOJ to cushion the blow. "We know that the government is going to press ahead with structural reforms and in that process, we'll probably see the effects of bad-loan disposals," said Vice Economics Minister Eiji Kawade. "We hope the BOJ will consider the different steps it could take."
Robert Feldman, chief economist at Morgan Stanley Dean Witter, said he expected the BOJ to comply -- but not until the government matches its reform words with deeds. "The BOJ has made clear it will be willing to move if the government actually delivers. Most market participants' view is that the BOJ is helping the Koizumi government with structural reform by saying, 'Show me the reforms'," Feldman said.
BLEAK ECONOMY
A deflationary wave of bankruptcies would cast further shadows over Japan's already bleak economic landscape.Data on Monday showed output shrank 0.2 percent in the first quarter of the year and Finance Minister Shiokawa projected an even weaker second quarter -- an outcome that would constitute a relapse into recession for the fourth time in a decade.
"We still fully expect some sort of easing later in the year, perhaps August or September, as the economy deteriorates," said James Malcolm, an economist with J.P. Morgan. In holding steady, the BOJ said it would continue to keep its target volume for current account deposits -- the sum of bank reserves and deposits of non-bank institutions parked at the BOJ -- at five trillion yen ($41.2 billion).
The BOJ adopted that target, which effectively cut short-term interest rates to zero, at its March 19 meeting and pledged to stick to it until core consumer prices stop falling. Although interest rates are at zero, economists who favour further easing say the BOJ has by no means exhausted its options.
They say the bank could increase its current-account target, possibly by stepping up purchases of government bonds, or sanction a drop in the yen, which would help exports and tend to push up inflationary expectations. Others want the BOJ to be more aggressive in countering deflation by actively striving to hit an inflation target -- the LDP's Aizawa suggested aiming at one percent to 1.5 percent.
Reserves at the central bank are the basic building block for money and credit expansion in the economy. But with banks shy to lend and customers eager to pare their debts, demand for central bank funds is so weak that some economists say raising the liquidity target would be pointless.
"Further quantitative easing doesn't really make much difference any more, so refraining from taking more action was very understandable," said Mitsuru Saito, chief economist at Sanwa Securities. "We all know that monetary policy will not have much effect on reviving the economy." (With additional reporting by Tamawa Kadoya, Yonggi Kang and Alan Wheatley)