Japan looks increasingly likely to fire both fiscal and monetary barrels in the coming weeks to help recovery and arrest unwelcome gains in the yen, with direct currency intervention off the table after a cool reception from its US ally.
After the rising yen helped push exports down for a sixth month in March and deadly earthquakes hit southern Japan last week, the Bank of Japan is facing calls from government aides to promptly expand its money-printing stimulus, Reuters reported.
Prime Minister Shinzo Abe is already set to announce a fiscal stimulus plan of up to ¥10 trillion ($91 billion) extra spending around the time he hosts a Group of Seven summit in late May, which could agree on more government expenditure to boost global growth.
And he could top that up with disaster-relief spending after the quakes, say government and ruling party officials involved in the policy-making.
Abe’s aides also said the economic impact of the quakes raised the chances he would delay a sales tax hike scheduled for next year and increased the need for more central bank action.
“If output weakens and consumer sentiment cools as a result of the quakes, the conditions justifying additional monetary easing would all fall into place,” said a senior government official with direct knowledge of policymaking.
The BOJ has been printing up to ¥80 trillion a year to buy bonds since 2013 in a bid to end decades of stagnation and deflation, and sources have told Reuters it is likely to debate further monetary easing when it reviews policy on April 27-28.
Unresponsive Gambit
Though policymakers hope a combination of fiscal and monetary stimulus measures will head off the yen’s rise and restart Japan’s stalled economic recovery, some doubt that the weapons available to the central bank and government are powerful enough to make much difference.
Hideo Kumano, chief economist at Dai-ichi Life Research Institute, said it was “uncertain whether tax revenues will increase enough to fund a big spending package”, and the BOJ’s most recent gambit—negative interest rates—had failed to trigger the desired market response.
There are also concerns that the BOJ so dominates the market for Japanese government bonds that it is becoming increasingly difficult to satisfy its existing demand, let alone a further increase.
Despite such doubts, looser monetary policy might be the only show in town to cool the yen, after Washington last week emphasized G-20 commitments to avoid currency devaluations, apparently brushing off Tokyo’s view that the yen’s rise was “one-sided”. The dollar hit 17-month lows below 108 yen last week, unsettling policymakers, who see any slide in the currency pair below 105 yen as alarming. It has since rallied a little to around 109 yen.
