One of Prime Minister Shinzo Abe’s close economic advisers has called on the head of the Bank of Japan to more clearly back up his readiness to take action should the economy suffer a sudden slump after the sales tax is raised next year.
In the recent debate over the plan to raise Japan’s sales tax, Bank of Japan Gov. Haruhiko Kuroda strongly urged the government to proceed with the hike, saying the central bank could deal with a potential economic slowdown that might come in its wake, but not the jumps in interest rates a change in plan could bring about.
“If he really means what he said, I want him to send out a strong message once again that he will take every measure available in case the economy slumps,” Shizuoka University Prof. Etsuro Honda said Thursday in an interview.
Mr. Kuroda has said that while he doesn’t expect the tax hike to derail Japan’s ongoing economic recovery, if it does, the central bank will offer additional monetary stimulus. But Mr. Honda said: “I’d like him to say that more strongly.”
Coming two days after Mr. Abe made a much-awaited decision to proceed with the plan to raise the 5% sales tax to 8% in April, Mr. Honda’s remarks suggest continued discord among policy-makers, and indicate that the central bank could find itself increasingly in the spotlight as the tax hike draws closer.
While Messrs. Honda and Kuroda have shared the view over the need for bold monetary easing to defeat deflation, they have found themselves on opposite sides during the sales tax debate since early summer.
Mr. Honda insisted that the government postpone the hike or go more slowly, saying that the economic recovery was too fragile to withstand a hike as big as three percentage points. The economic blow from it could cancel out the benefits of Mr. Abe’s “Abenomics” policy mix, and chill a growing sense of optimism among the Japanese that has helped drive the nation’s solid growth so far this year, the professor has said.
Mr. Honda said Thursday a stronger commitment by the BOJ to support the economy is now needed to keep influencing Japanese expectations, which he said holds the key to reversing chronic price falls.
“I want (the BOJ) to give a sense of assurance” to consumers, Mr. Honda said, adding that a planned Y5 trillion spending plan by the government won’t be enough to cushion the impact of the tax increase.
“There has been what we call a ‘regime change’ in Japan’s policy framework thanks to Mr. Kuroda’s initiatives, and the Japanese people believe in this,” Mr. Honda added. “But this ‘regime change’ could fall apart unless the BOJ continues to signal its stance in the most appropriate fashion, showing that it is prepared to act anytime it is necessary.”
While the BOJ may not need to take action to coincide with the tax increase, “it should act immediately as soon as the economy suffers a sharp reactionary slump in April or afterward,” Mr. Honda said. Indeed, the bank “will probably find itself with no choice but to act, as there is likely to be a significant reactionary plunge” in consumer spending, he said.
Coming during the BOJ’s two-day policy meeting which ended Friday, Mr. Honda’s call for a fresh promise of action could make investors more focused on what the BOJ governor will have to say at a press conference following the board meeting. The BOJ took no fresh action at the latest meeting, as widely expected.
The 10 economists recently polled by The Wall Street Journal say the BOJ won’t be able to achieve its 2%-inflation-in-two-years target, with many of them predicting that further monetary stimulus will take place in April.
Mr. Honda said that one option will be for the central bank to start buying mortgage-backed securities issued by the government-affiliated Japan Housing Finance Agency. With the tax hike expected to hit demand for big-ticket items, such as houses, “I believe that supplying funds into those markets will be a good idea,” Mr. Honda said.
The bank can also step up its purchases of exchange-traded equity funds and real-estate investment funds–types of assets it already buys under the aggressive easing program launched in April this year, he said.
Buying more Japanese government bonds “could have the effect of influencing expectations as it could reaffirm (the BOJ’s) commitment,” Mr. Honda said.
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