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For Japan's central bank and government, there are no easy answers to a growing deflation problem. A loose monetary policy so far has been ineffective and extra stimulus comes with the dire consequence of adding to the nation's debt burden.
As expected, the Bank of Japan (BOJ) held interest rates at 0.1% Friday as the budding recovery in the world's second-largest economy is showing signs of slowing.
"The BOJ felt compelled to show that it doesn't accept deflation and is committed to fighting it," Yasunari Ueno, chief market economist at Mizuho Securities Co. Ltd. told Bloomberg News. "It's reinforcing the view that interest rates will stay very low."
Weak international demand for Japanese goods and a strengthening yen prompted deflation earlier this year, and the nation's consumer price index (CPI) – excluding fruit, vegetable and seafood prices but not oil products – is expected show a decline of 1.7% in November according to a median estimate of 25 analysts surveyed by Bloomberg. The CPI fell 2.2% in October and 2.3% in September.
The rising value of the yen has taken a toll on some of its largest exporters. Electronics companies will lose a combined $369 million (31.8 billion yen) in annual operating profit for each 1 yen appreciation against the dollar, according to a Daiwa Research Institute Ltd. estimate of 44 companies in September.
Japan's closely watched Tankan survey of 210,000 private firms – which excludes financial institutions, but includes autos and electronics – gained nine points to minus 24 this month. A negative number means pessimists outnumber optimists.
Japan's central bank took the necessary step of making $115 billion (10 trillion yen) available in three-year loans at the current 0.1% rate on Dec. 1. A week later, the still-newly elected Japanese government injected $80.6 billion (7.2 trillion yen) in stimulus to combat deflation as well as unemployment.
While the extra stimulus could help curb deflation, there's still Japan's massive debt to worry about. Its national debt is almost twice the level of its GDP. The Organization for Economic Cooperation and Development (OECD) predicts Japan's national debt will rise to more than 200% of its gross national product in 2011 from 170% in 2007, already the highest among rich nations.
Some of the financing for the new stimulus will come from funds the nation's Democratic Party culled from the previous government's budget. But it's unclear where the rest of the funding will come from.
"We have no idea how this spending will be financed," Carl Weinberg, an economist at High Frequency Economics, told The New York Times.
The BOJ's loosening of money is being utilized – commercial lenders asked to borrow 8.5 times more than the amount offered by the central bank in a Wednesday auction. The move could be expanded if necessary, it said.
But when the BOJ loosened that money earlier this month, it kept its assessment of Japan's economy unchanged, saying that "there is not yet sufficient momentum to support a self-sustaining recovery."
Like the U.S. Federal Reserve's "extended period" credo on interest rates, the BOJ said in October that rates would stay at the current level for "some time." Most analysts polled by Bloomberg anticipate Japan's rates will hold for all of next year.
The BOJ expects deflation to last through March 2012, the CPI to decline by 0.8% in the next fiscal year and 0.4% in fiscal 2011.
News and Related Story Links:
- Bank of Japan:
Statement on Monetary Policy.
- Bloomberg News:
BOJ Won't Tolerate Deflation, Keeps Rate at 0.1%.
- Money Morning:
Does the Bank of Japan Have Enough Juice to Overcome Nagging Deflation?
- Money Morning:
Japan's Economic Growth Accelerates, but Deficit Raises Concerns.
- The New York Times:
Japan's Leader Promotes $81 Billion Stimulus Plan.
- Money Morning:
Fed Maintains Monetary Policy but Eyes Inflation in the Offing.