Japanese Prime Minister Yoshiko Noda, right, and opposition Liberal Democratic Party president Shinzo Abe bow to each other before their debate in parliament, Nov. 14, 2012.Itsuo Inouye/The Associated Press
A surprise Japanese election is expected to ratchet up pressure on the Bank of Japan to do more to kick-start an economy hobbled by monster debts, deflation and shrinking GDP.
Prime Minister Yoshihiko Noda said Wednesday he'll dissolve the lower house of parliament Friday and call a snap election Dec. 16 as he battles tumbling poll numbers and the spectre of another recession.
It's an election pollsters say Mr. Noda will almost certainly lose.
That paves the way for a return to power of Shinzo Abe, leader of the once-dominant Liberal Democratic Party, who is expected to pressure the Bank of Japan into much more aggressive monetary easing as a way out of the country's economic funk.
"We'll let the people decide which of us is more qualified to lead the country out of deflation and get the economy back on track," Mr. Abe told Mr. Noda during a heated exchange in the house.
The imminent election sent the yen to its largest one-day plunge versus the U.S. dollar in eight months as investors braced for even further stimulus. The yen also fell against most other major currencies, including the Canadian dollar.
The prospect of the LDP's return after a three-year hiatus means Mr. Abe would "further exert his influence on the Bank of Japan to step up its activism ... by way of more extensive assets purchases," argued Ashraf Laidi, chief global strategist at City Index/FX Solutions.
Mr. Abe is also a foreign-affairs hawk, recently promising to take a more muscular stand against China in territorial disputes and to rescind previous government apologies for Japan's World War Two atrocities.
The political turmoil comes just days after the release of data showing that Japan's economy is shrinking again – 0.9 per cent (3.5 per cent annualized) in the third quarter, which ended in September.
Major exporters, including Sony Corp. and Panasonic Corp., are busily slashing spending plans as they grapple with mounting losses and stiff competition from China, South Korea and elsewhere.
Many economists say Japan may already be in recession – often defined as two consecutive quarters of GDP contraction. Another recession would be the country's fifth in 15 years.
Japan eked out GDP growth of just 0.1 per cent in the second quarter. The economy also shrank in the fourth quarter of last year.
The weakening economy has been a source of mounting tension between the government and the central bank in recent months. Government officials have repeatedly called for more monetary easing to go along with interest rates that are already near zero.
Bank of Japan Governor Masaaki Shirakawa, on the other hand, wants the government to do more to rein in government debt, which has now hit 230 per cent of GDP – the worst in the Group of Seven.
In October, Mr. Shirakawa acknowledged that the central bank has struggled to fight deflation and spur the economy. Over the years, it has used most of the monetary policy tools used by other banks, including buying government bonds and expanding the money supply. "I feel there's almost none that the BOJ hasn't tried," he told reporters.
Mr. Abe and the LDP could soon be in a position to overhaul the BOJ, and perhaps shift monetary policy. Mr. Shirakawa's term is set to end in April. Two of his key deputies' tenures end in March.
Mr. Noda's Democratic Party of Japan (DPJ) has a comfortable majority in the lower house but depends on other parties to push legislation through the upper house.
The DPJ ousted the LDP from power in 2009 after more than 50 years of almost uninterrupted rule with promises to cut spending and hold the line on taxes. But faced with a soaring deficit, the government instead nearly doubled the 5 per cent sales tax, leading to a revolt in Parliament and sending Mr. Noda's poll numbers plunging.