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Capitalizing on his sweeping electoral victory over the weekend, Japan’s next prime minister, Shinzo Abe, stepped up pressure Monday on the Bank of Japan to ease monetary policy dramatically in an effort to end deflation and jump-start the country’s economy.

Abe’s center-right Liberal Democratic Party scored an overwhelming victory in Sunday’s parliamentary election after a highly unusual campaign in which he focused his attacks more on the central bank than on the outgoing government of Prime Minister Yoshihiko Noda. NHK public TV said Monday the LDP had won 294 seats in the 480-member lower house of parliament while its ally, the New Komeito party, won 31 seats, giving them the two-thirds majority needed to overrule most matters in the upper house, where Noda’s Democratic Party of Japan holds the largest number of seats.

During the campaign, Abe had declared that the top priority of an LDP government would be to bring an end to the deflation that has plagued Japan’s economy for 15 years. To that end, he called on the Bank of Japan to double its inflation target, to 2 percent, and to ease aggressively along the lines of the U.S. Federal Reserve Board to reach that goal. He also identified the strong yen as an archenemy of business and vowed to press for measures, including purchases of foreign bonds by the BoJ, to weaken it. Abe even threatened to override the central bank’s independence if it didn’t bow to the will of the government.

Abe kept up the pressure at a post-election news conference on Monday. “It was very rare for monetary policy to be the focus of attention in an election, but there was strong public support to our view,” he said. “I hope the Bank of Japan takes this into account” when its policymaking body meets this Wednesday, he added.

Financial markets reacted to the LDP victory by pushing the yen lower, to 83.78 to the dollar from 83.45 on Friday, and driving up Japanese stock prices. The Tokyo Stock Exchange’s Nikkei 225 index rose 91.32 points, or just under 1 percent, to 9,828.88.

Japan’s central bank has long drawn criticism from outside economists for its seeming passivity. The bank’s determined effort to rein in asset prices in the late 1980s effectively burst the country’s property bubble and set in train a lengthy period of stagnation — the so-called lost decades — that have produced a stubborn deflation. The BoJ was slow to adjust to the changed circumstances. It didn’t adopt an inflation target until February 2012 and then set it at a mere 1 percent, the lowest of any major central bank. Although the BoJ has bought bonds over the past decade, it has resisted the bold intervention style and explicit economic targets adopted by the Fed.

What’s new today is the extent to which the BoJ is under attack at home. Abe, who served a previous stint as prime minister in 2006 and 2007, has been notably strident in his criticism, but he is hardly alone in his attacks. Lawmakers summoned central bank governor Masaaki Shirakawa to the Diet, Japan’s parliament, several times in February 2012 to criticize his cautious policy approach and urge stronger action on deflation. The pressure appeared to work, as the BoJ that month unveiled its inflation target and announced an increase of ¥10 trillion ($122 billion) in its asset purchasing program.

But with deflation persisting and Japan’s economy sputtering — output contracted at a 3.5 percent annual rate in the third quarter — calls for bolder measures have intensified. Indeed, a new consensus seems to have taken hold. After two decades of failed stimulus efforts that have left Japan with the highest debt levels of any major country, while China’s economy has overtaken it in size and South Korea has raced ahead in competitiveness, much of the political class believes that aggressive monetary easing by the BoJ offers the last, best hope of ending the country’s long slump.

Politicians of all stripes are “very serious now about the need to end deflation,” says one senior bank official, who spoke on condition of anonymity. 

Markets have clearly sensed a shift in policy in the making. The prospect of easier monetary policy prompted the yen to slide by more than 5 percent between late September and early December, while the Nikkei 225 has risen more than 13 percent since mid-November.

Jim O’Neill, chairman of Goldman Sachs Asset Management, says Japan’s economy, especially its large export sector, has been hurt by a “very overvalued exchange rate,” but he adds that the prospect of a shift in central bank policy could turn that around. “I have been getting more and more negative about the yen for the past couple of years, and I have so far been wrong,” O’Neill says. “But it seems more and more obvious to me that the moment is here.”

It’s not hard to see why Abe and others are focusing their attention on the central bank. The economy has grown at an average annual rate of barely 1 percent over the past two decades. Consumer prices have been falling gently for much of the past 15 years; the annual rate stood at –0.4 percent in October. Politicians are eager to try anything that might give the economy a jolt.

A weaker yen could also relieve some of the pressure on corporate Japan. The currency has eased somewhat since hitting a record high of 75.31 to the dollar in 2011, but many analysts believe it is overvalued by anywhere from 10 to 25 percent.

“The opportunity in Japan will probably be a currency opportunity, being short the yen,” says Mark Dowding, head of investment-grade fixed income at BlueBay Asset Management, a London-based specialist bond manager. “I do believe you’re going to see more balance-sheet expansion next year.”

Abe’s gambit is not without risk. A higher inflation rate and a weaker yen could drive up interest rates and destabilize the market for Japanese government bonds. The country’s low rate levels — ten-year JGBs were trading at yields of about 0.70 percent in early December, versus 1.56 percent for comparable U.S. Treasuries — are among the main reasons Japan can sustain debt of some 236 percent of gross domestic product.

In its annual review of the Japanese economy, released in August, the International Monetary Fund warned that a 100-basis-point rise in JGB yields over five years would keep the debt growing simply because of higher debt-servicing costs; this would occur even if the government succeeded in eliminating its big structural budget deficit, which stands just above 9 percent of GDP. With the country’s fiscal policy effectively tapped out, the Fund recommended further monetary easing by the Bank of Japan, including a substantial increase in asset purchases, to combat deflation and stimulate the economy. Even if the BoJ does open the money taps, there is no guarantee that such efforts will produce the desired result. The central bank may well have been too conservative in the past, but years of asset purchases have given it a balance sheet that at roughly 35 percent of GDP is larger than that of the Fed. And quantitative easing hasn’t proved to be a panacea for Fed chairman Ben Bernanke or Bank of England governor Mervyn King.

“I don’t think there will be much impact of monetary policy on Japan’s deflation,” says Tohru Sasaki, chief foreign exchange strategist at JPMorgan Chase Bank in Tokyo. “The nominal yield [on JGBs] is already zero, and what the BoJ is doing is just buying JGBs from the banks. That does nothing to change inflation expectations. Only if money goes out [into the real economy] and inflation expectations go up will the real yield go into negative territory, and that will make the yen depreciate.”

Achieving the center-right LDP’s goals would seem to be a tall order, but Abe nevertheless appears intent on trying to lift Japan’s animal spirits by setting ambitious targets.

The political pressure on the Bank of Japan is not an idle threat. The next prime minister will have the opportunity to nominate a successor to the hawkish Shirakawa when the bank governor’s term expires in April, as well as two deputies. Those appointments could shift the balance of power on the central bank’s nine-member Policy Board to favor the doves. Three recent appointees to the policymaking body are thought to support greater monetary easing. “If the new appointees are in favor of the Abe policy, that will make a majority in favor of further easing,” says Rei Masunaga, former head of the central bank’s foreign department.

Although Abe has spoken of raising the inflation target as high as 3 percent, the LDP platform calls for the government to reach a compact with the central bank to lift the rate to 2 percent. If the central bank doesn’t cooperate, Abe has said the LDP would propose changes to the 1997 Bank of Japan law to reduce the institution’s autonomy in monetary matters.

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