6 February 2009

On the road to Global Weimar ~ FT on Japan

MPs step up clash with Bank of Japan

By Michiyo Nakamoto in Tokyo

February 5 2009 19:19

A plan to print some Y50,000bn ($546bn) worth of a new currency to fund pump-priming projects has been drawn up by influential politicians in Japan in a sign of desperation in the ruling Liberal Democratic party over the country’s failing economy.

To be released on Friday, the proposals to issue government notes come amid rising frustration among politicians with the independent Bank of Japan. It has been reluctant to bow to pressure to run the yen printing presses faster to stimulate the economy.

The politicians include Yoshihide Suga, deputy chairman of the LDP’s election strategy council and a close aide to prime minister Taro Aso, and want the government to issue its own notes to fund projects.

The group wants Y30,000bn of the new money to fund programmes supporting new industries and infrastructure projects, including doubling the size of Tokyo’s Haneda airport. The remaining Y20,000bn would be earmarked for government purchases of stocks and real estate.

“We are facing hyper-deflation, so we need a policy to create hyper-inflation. We have to do something to undermine the central bank and government’s credibility or else we won’t be able to halt the yen’s rise. So, while we know this is drastic medicine, we will do it,” said Koutaro Tamura, an upper house Diet member who will chair the new group.

The plan for the government notes came as Atsushi Mizuno, a board member of the BoJ, warned that the central bank, needed to take “extraordinary” measures to counter Japan’s deepening recession.

Warning that the Japanese economy would remain in a “severe” state, Mr Mizuno said it was “important to be ready to act promptly and consider taking policy action that may be considered extraordinary under normal circumstances”.

Critics said the currency scheme could result in a surge in inflation that would damage the credibility of the BoJ, even though it would not be responsible for issuing the new currency. Others point out that it would be far easier to achieve the same effect by urging the central bank to buy more government bonds.

Richard Jerram, chief economist at Macquarie Securities in Japan, said the emergence of policy proposals that had previously been seen as unthinkable was a “move forward” that could push the monetary authorities into action even if the notes were never printed. “By threatening them with this plan, the real aim could be to twist the BoJ’s arm to take more action,” he said.

The proposals reflect the government’s difficulties, with Japan’s industrial output and exports down by record rates in December and unemployment up the most in over 40 years. With an election due by September at the latest, the BoJ forecasts at least two years of economic contraction and deflation. Voters are increasingly concerned by the government’s lack of decisive economic action.

Copyright The Financial Times Limited 2009

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