Japan central bank to launch stimulus

TOKYO - Japan is taking aggressive action to lift consumer prices, encourage borrowing and help pull the world’s third-largest economy out of a long slump.

Like the U.S. Federal Reserve, Japan’s central bank plans to flood its financial system with more money - its most far-reaching step to date to get consumers and companies to borrow and spend.

The Bank of Japan’s action will also drive down the value of the yen. A cheaper currency will make Japanese goods - from Toyota cars to Sony TVs - less costly for Americans and other foreigners. And it will make U.S. and other exports more expensive in Japan.

The move comes as major central banks around the world are acting to encourage borrowing and stimulate their economies. On Thursday, European Central Bank President Mario Draghi said the central bank is considering doing more to shore up the ailing economy of the euro alliance. The central bank left its benchmark interest rate unchanged at 0.75 percent, but Draghi said an interest rate cut was discussed Thursday.

Draghi also said the central bank is considering “various tools” beyond lower rates in case Europe’s economy needs more help.

Dan Akerson, Chief Executive Officer of General Motors Co., told CNBC that he feared the Bank of Japan’s policies would give Japanese automakers a price advantage over GM in the United States.

“They’re an export economy,” Akerson said. “You have to be suspicious of what they’re doing and why.”

But many economists say the rest of the world will benefit, too: A faster-growing Japan will buy more products and services from the United States, China and Europe, helping their economies.

“We could see some faster and sustainable growth now in Japan,” said Bernard Baumohl, chief global economist at the Economic Outlook Group. “That will obviously help the global economy.”

Japan’s economy has been sputtering for two decades. Last year, weak consumer spending kept prices flat. The Bank of Japan hopes to increase inflation to 2 percent within about two years. Economists say Japanese consumers will start spending if they know prices are going to rise.

In its announcement, the Bank of Japan said it plans to buy more than $530 billion a year in government bonds. Bank of Japan governor Haruhiko Kuroda described the scale of monetary stimulus as “large beyond reason,” but said the inflation target would remain out of reach if the central bank stuck to incremental steps.

“We’ll adjust without hesitation if need be, while monitoring economic and price conditions,” he said.

The central bank said it intended to “drastically change the expectations of markets and economic entities.”

Japanese stocks jumped and the yen sank after the central bank’s announcement. The yen weakened 3 percent against the dollar while Tokyo’s Nikkei stock index rose2.2 percent to 12,634.54.

U.S.-listed shares of Japanese automakers rose sharply, reflecting the belief that a weaker yen would make Japanese vehicles cheaper in markets outside Japan.

“By committing today to meet a 2 percent inflation target in two years, Gov. Kuroda can justifiably claim to have set the Bank of Japan on a new path,” said Mark Williams of Capital Economics.

“But while markets have welcomed the announcement, the credibility of this pledge is soon likely to be called into question,” he said in a commentary.

Kuroda has vowed to do what he must to meet the inflation target within two years. Thursday’s decision after a two-day policy meeting makes that central bank policy. Signaling a consensus behind Kuroda, most items agreed upon received unanimous support from the nine member board.

Eswar Prasad, an economist at Cornell University, cautioned that Japan needs more than easy-money policies to repair its economy. It needs to reduce its debts and reform policies that protect weak firms from competition and undercut the country’s productivity.

“Japan would no longer be a drag on the global economic recovery if it had stronger domestic demand and positive inflation,” Prasad said. “However, it is far from clear that the Bank of Japan’s actions will be able to deliver these positive outcomes in the absence of broader structural reforms that are essential to revive Japan’s productivity and competitiveness.”

Business, Pages 25 on 04/05/2013

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