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November 27, 2009

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Home » Business » Economy

Bank of Japan feeling the pressure

JAPAN'S government made some of its most pointed remarks to the Bank of Japan at its October 30 policy meeting about the need for action to combat deflation, underlining the simmering row between the two over how best to handle the economy.

Government rhetoric has become sharper in recent weeks as it tries to prod the central bank to do more to act against falling prices.

Normally the two government representatives who attend rate reviews stick to the line the central bank should support the economy with monetary policy. They cannot vote on monetary policy but can voice opinions.

But the Ministry of Finance representative broke ranks on October 30 by calling on the bank to clarify its stance on how it will tackle deflation, the meeting's minutes showed.

The government has been vague on what it wants the bank to do beyond keeping interest rates low. But analysts say the bank may eventually have to buy more government bonds, or return to a quantitative easing policy of flooding markets with extra cash.

"The pressure on the Bank of Japan is set to increase, so quantitative easing is an option. But the effect on the economy will be limited," said Koichi Haji, chief economist at NLI Research Institute.

At the October 30 meeting, the bank decided to begin withdrawing from credit markets but extended a key loans program, after government criticism over its moves to end corporate support put in place during the financial crisis.

The bank has since raised its economic assessment, much to chagrin of the government which is considering looser policies to try to underpin a recovery.

Another government representative at the October 30 meeting proposed setting up a regular forum for talks, but Governor Masaaki Shirakawa said only that the bank would continue to closely communicate with the government.


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