At a recent quarterly Bank of Japan branch managers' meeting, BOJ governor Shirakawa warned that employment and wage conditions in Japan would deteriorate further and that corporate earnings and their ability to raise funds remained under pressure. "Under these circumstances, the possibility is high that the nation's economy will continue deteriorating for the time being", he was quoted as saying by the Dow Jones Newswires. His tone ostensibly conveyed a deep sense of gloom, according to Western press reports, and raise the likelihood the central bank would revise down its growth outlook when it releases its semiannual outlook report on the economy April 30.
Mr. Shirakawa even suggested deflation had returned, saying wholesale prices are likely to keep trending lower as commodity prices continue to cool amid weak global demand. This should also come as no surprise as March wholesale prices fell 2.2% and the rate of the decline was the sharpest in nearly seven years.
The fact is, the Bank of Japan and the government are way behind the curve in cutting their forecast for Japan's economy in 2009. In January, the Bank lowered its forecast to minus 2% growth from a prior 0.6% increase last October, while the government still has a zero growth forecast. Meanwhile, international agencies like the IMF, OECD and the World Bank were falling over themselves to slash Japan's growth forecast to a minus 5%~6%, while the domestic private sector consensus was looking for minus 4%-plus.
In this light, it would be no huge surprise if the BOJ lowers its forecast after everyone else in the world has. But what Mr. Shirakawa and his colleagues at the Bank are trying to avoid is being pressured by the LDP and government to use its balance sheet even more aggressively to ensure credit flows and help the government with its heavy issue calendar of JGBs by directly purchasing (monetizing) government debt. Mr. Shirakawa has so far responded to this pressure by insisting that buying more JGBs would harm the banks "reputation" and work to weaken the yen. Excuse me? I thought a weaker yen is what everyone wanted. His excuse in resisting more direct purchases of JGBs by the BOJ is that the Bank is prevented from holding more government securities than there are Bank notes in circulation. By our calculation, the BOJ still has lots of room to directly buy JGBs, even under this rule.
Unlike the close cooperation between the Fed and Treasury, the BOJ is acting more like a disinterested observer that would rather not have to consort with those "people" in the government, even as foreign investors are speculating that the MOF/BOJ will eventually be forced to aggressively sell down the yen in an effort for Japan to depreciate its way out of a deep recession.
