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Recession fears loom over Japan’s impending election

Bank of Japan Governor Masaaki Shirakawa walks into a news conference in Tokyo October 30, 2012. The Bank of Japan’s board is likely to leave policy unchanged at its two-day meeting that begins Monday, say analysts who keep close tabs on the central bank and its governor.

Yuriko Nakao/REUTERS

As Japan teeters on the brink of its third recession since 2008 and its embattled Prime Minister, Yoshihiko Noda, prepares to face an unhappy electorate next month, monetary policy makers seem determined to stay on the sidelines – at least for now.

The Bank of Japan's board is likely to leave policy unchanged at its two-day meeting that begins Monday, say analysts who keep close tabs on the central bank and its governor, Masaaki Shirakawa.

Mr. Shirakawa has said in recent public comments that while the bank remains committed to "powerful monetary easing," the government needs to do the heavy lifting to get the economy back on the rails through badly needed structural reforms, deregulation and other measures to boost corporate spending and stimulate growth.

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The upshot is that the Bank of Japan probably will refrain from further easing this year, "unless things get substantially worse," said David Rea, Japan economist with Capital Economics in London.

Help is unlikely to come from a shaky government that has been all but paralyzed for months. Mr. Noda finally bowed to long-standing opposition demands to call an early election in exchange for support for electoral reform and long-delayed approval of deficit-financing bills needed to cover budget expenses for the second half of the fiscal year.

Opposition leader Shinzo Abe's Liberal Democratic Party is expected to outpoll Mr. Noda's Democratic Party of Japan in the vote, set for Dec. 16. Mr. Abe, a former prime minister, has promised supplemental budgets to inject more stimulus into the economy and is calling for much more aggressive intervention by the central bank that would include pushing interest rates below zero – in effect, charging commercial banks for depositing money with the central bank.

The idea is to force banks to take more risk and make more loans, stimulating growth and business expansion.

The LDP has also floated the idea of setting up a joint fund with public and private financing to acquire foreign bonds in an effort to lower the strong yen and attack deflation.

At its previous meeting Oct. 30, the Bank of Japan opted for modest easing for the second time in as many months, boosting asset purchases by ¥11-trillion ($138-billion) to ¥91-trillion. Unless it adopts Mr. Abe's negative rate proposal, which most bank watchers regard as unrealistic, the central bank has no room to cut interest rates, which range from zero to 0.1 per cent.

But some economists say the bank will indeed be forced to take more drastic measures, possibly as soon as its next meeting in December, as the economic storms worsen.

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The government reduced its economic forecast last week for the fourth consecutive month, as the economy shrank in the third quarter by 3.5 per cent on an annual basis. And no recovery is in sight, as the crucial export sector weakens further and companies slash capital spending.

Capital expenditure fell a worse than projected 3.2 per cent in the quarter, the biggest drop since the second quarter of 2009, reflecting growing corporate worries about declining profits in the face of sliding demand and an overvalued currency.

"The tools which Japan's economic managers have to move the economy ahead are today limited," said Ken Courtis, founding partner of Themes Investment Management in Hong Kong and a long-time Japan watcher. "With … a change of government in the offing, the only lever that they can immediately pull is yet more aggressive monetary easing. "

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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