Pressure for BOJ Easing Intensifies as Economy Minister Urges Action

By Leika Kihara

TOKYO – Political pressure on the Bank of Japan (BOJ) to increase stimulus is mounting, with the economy minister urging the bank to collaborate with the government to enhance economic growth.

Prime Minister Shinzo Abe delivered a significant message on Wednesday by announcing a 28 trillion yen ($267 billion) stimulus package, as Economy Minister Nobuteru Ishihara pointed out in media reports shortly after the announcement. This amount exceeded market expectations.

"I believe the officials at the BOJ will take this into account and make a suitable decision. I think BOJ Governor Haruhiko Kuroda understands that the world is paying attention," Ishihara said during a television appearance. His comments imply that the government’s early announcement of the economic package was a strategic move to encourage the BOJ to expand its stimulus measures during the two-day rate review concluding on Friday.

"Abe’s announcement is a squeeze play on the BOJ. The BOJ has to act now; it is unavoidable," stated Hiroaki Muto, an economist at Tokai Tokyo Research Center. He emphasized the growing sentiment that the BOJ cannot influence the market independently, which is part of the government’s push to integrate fiscal and monetary policy.

ENHANCED PACKAGE

Abe’s stimulus announcement positively impacted Japanese stocks and heightened market expectations for the BOJ to complement fiscal measures with additional monetary easing. However, sources familiar with the situation indicated that the package includes 15 trillion yen of loans from quasi-government financial institutions, loan guarantees, and subsidies for private companies. This means that only around 7 trillion yen, or a quarter of the total package, would be direct fiscal spending, which could disappoint some investors anticipating larger outlays.

An additional 6 trillion yen will be allocated for a fiscal loan and investment initiative designed to promote private-sector spending, such as the construction of a "maglev" train line. Following the announcement, Japan’s stock market dropped by more than 1 percent on Thursday as the initial excitement over Abe’s package waned, redirecting focus onto the BOJ.

Market consensus suggests that the BOJ will significantly lower its inflation projections and further ease its policy by expanding its extensive asset purchase program and possibly deepening negative interest rates. However, the central bank seems hesitant to take drastic actions that might defy heightened market expectations, even if it opts for some easing.

Many BOJ policymakers are inclined to postpone any easing actions, being concerned about the increasing risks associated with additional asset purchases, which are impacting bond market liquidity. Nonetheless, Ishihara’s comments indicate that political factors may drive the BOJ to take action, despite its struggle to stimulate the economy with limited resources.

Sources close to the discussions indicated that finance ministry officials have been encouraging the BOJ, behind the scenes, to ease policies further on Friday to decrease borrowing costs even more.

Kuroda, who has a background in the finance ministry, has dismissed the possibility of implementing "helicopter money" or direct financing of public debt but has suggested that coordinating fiscal and monetary policy to amplify growth effects is a reasonable approach.