Faced with an economy teetering on the brink of recession and the spectre of crippling deflation, the Bank of Japan has turned to one of the few weapons left in its arsenal – further monetary easing – for the second time in as many months.
But despite intense political pressure, a slew of worsening numbers and its own gloomier economic forecast, the central bank opted Tuesday for only a modest increase in firepower. The bank is boosting its potential asset purchases by ¥11-trillion ($138-billion) to ¥91-trillion, near the low end of analysts' estimates.
It has also launched a lending facility of unlimited size to encourage commercial banks to write more loans of their own, by locking in their cost of funding at 0.1 per cent for up to four years.
But the problem is a lack of demand, not capital, analysts say. And the intervention doesn't begin to address badly needed structural reforms from government to boost competitiveness, reduce business costs and improve domestic consumption at a time when key export markets are faltering.
The central bank left interest rates unchanged. But at a range of zero to 0.1 per cent, it has no room to make further cuts.
The bank said its newest measures are necessary to ensure "sustainable growth with price stability." But the latest data show just how difficult that task is becoming.
Industrial production plunged 4.1 per cent last month, the worst showing since March, 2011, when the earthquake and tsunami hit. The main culprits this time were falling export demand in major markets, including China, where a deepening political row over control of a chain of tiny uninhabited islands in the East China Sea has triggered a backlash against Japanese consumer goods. The seasonally adjusted number compares with a decline of 1.6 per cent in August and 1 per cent in July, both typically slower months.
The continuing woes are translating into falling prices, sparking concerns about renewed deflation. The central bank now forecasts consumer price inflation in the next fiscal year of 0.8 per cent, below its medium to long-range target of 1 per cent. It lowered its economic growth forecast for this fiscal year to 1.5 per cent, down sharply from its earlier prediction of 2.2 per cent. Some private economists even suggest that revised number is too high.
The bank made a point Tuesday of blaming slumping foreign markets and "the spreading effects of the recent bilateral relationship between Japan and China" for the steep decline in output.
Nissan Motor Co. Ltd. chief executive officer Carlos Ghosn warned bluntly that the deterioration in Japan's relations with China could affect his company's plans to expand its foothold in a market that accounts for about 25 per cent of its sales. Nissan sales in China fell 35 per cent in September. Toyota Motor Corp.'s sales in China were down by nearly 50 per cent, while Honda Motor Co. Ltd.'s slumped 41 per cent.
"Decay in external trade is making a marginal difference, but most of Japan's problems are made at home," Carl Weinberg, chief economist with High Frequency Economics, said in a research note. "Our view is that no monetary policy in the world can resolve them."
Mr. Weinberg cited Japan's well-known demographic problems and "an unsustainable debt burden" that takes a big chunk out of government finances.
But to make matters considerably worse, all this is occurring against a backdrop of domestic political paralysis. The government of embattled Prime Minister Yoshiko Noda has been unable to win approval of the budget in a divided parliament, which blocks it from issuing ¥38.3-trillion in bonds to cover this year's deficit. Unless the opposition, which is trying to force the unpopular Mr. Noda into an early election, compromises, the government could run dangerously low on cash in coming weeks.
"Political leadership is critical to implement [effective] reform," said Motoshige Itoh, president of Japan's National Institute for Research Advancement. "The present weak functioning of politics makes it difficult to introduce drastic reforms facing opposition of various interest groups."
Still, the government managed to push through an emergency stimulus package last week worth just over ¥422-billion. But the main rescue appears to have been left in the hands of the central bank. Which helps explains why Economy and Fiscal Policy Minister Seiji Maehara attended the bank's policy meeting Tuesday for the second time this month. Previously, no cabinet minister had attended a bank meeting in nearly a decade.
Beforehand, Mr. Maehara repeated his concerns about the strong yen, which has hurt export profits, and the risks of deflation.
Afterward, the central bank issued a rare joint statement with the government highlighting their determination to combat deflation. That, coupled with Mr. Maehara's expanded "observer" role, prompted analysts to suggest that the government is treading on turf once jealously guarded by the central bank.
"We see its key implication as a formal tightening of the government's grip on the central bank," Naohiko Baba, chief Japan economist with Goldman Sachs and a former financial markets official with the Bank of Japan, said in a note.
The bank "has committed to continue powerful easing policy until [core] inflation of 1 per cent … is in sight," Société Générale analyst Kiyoko Katahira said in a note. But its own revised outlook signals that consumer prices will stay below that level through at least fiscal 2014, putting the onus on the bank to take stronger action.