Abe’s call for easy money lifts stock, pushes down yen

November 20, 2012


Opposition leader Shinzo Abe’s repeated calls for easy monetary policy and aggressive moves against deflation have driven up stock prices and hammered down the yen’s value.

Abe, who heads the Liberal Democratic Party and is considered a possible next prime minister after the Dec. 16 Lower House election, said bold monetary easing would be a pillar of his economic policy when the party returns to power.

“I will pursue anti-deflation measures with a different dimension than those previously implemented by the LDP,” Abe told a party meeting on Nov. 19. “The Bank of Japan should relax monetary policy without any restrictions.”

Although the ruling Democratic Party of Japan has warned of the dangers of Abe’s more radical ideas to stimulate the economy, the markets have so far responded favorably to the words of the former prime minister.

The Nikkei 225 index, the benchmark of the Tokyo Stock Exchange’s First Section, closed above 9,100 for the first time in two months on Nov. 19. It gained nearly 500 points over the past three trading days.

“Overseas investors were selling Japanese stocks, but they have turned into aggressive buyers with Abe’s recent remarks,” an official at a major securities house said.

The yen hit 81.50 yen against the dollar at one point in Tokyo trading on Nov. 19, the weakest level in seven months.

When the BOJ relaxes monetary policy, traders tend to sell the yen because interest rates in Japan decline. The yen’s depreciation usually leads to higher stock prices because it makes exporters more competitive overseas, thereby buoying the economy.

On Nov. 17, Abe floated a controversial proposal to have the central bank buy all bonds the government issues to finance public works projects.

The BOJ’s direct underwriting of government bonds is prohibited in principle under the Public Finance Law, a ban put in place after the central bank purchased government bonds to fund military expenditures before World War II.

Once the war ended, circulated bank notes became worthless and commodity prices shot up 90-fold, ruining ordinary people’s lives.

In a different speech on Nov. 17, Abe said he would have the BOJ print money unlimitedly to stimulate the economy, another unorthodox approach that could erode confidence in the Japanese currency.

Prime Minister Yoshihiko Noda, visiting Phnom Penh for the Association of Southeast Asian Nations conference, criticized Abe’s proposal on Nov. 19.

“If the government increases debt (in the form of bonds) and spends freely on public works projects, fiscal discipline will be lost,” Noda told reporters. “The BOJ’s underwriting of government bonds is also a taboo. It is a policy that should not be repeated.”

Seiji Maehara, minister in charge of economic and fiscal policy, has also demanded drastic monetary easing but has kept his distance from Abe.

“I am deeply concerned about Abe’s remarks, which apparently ignore the BOJ’s independence,” he said.

Abe remains undaunted, however.

“The yen has dropped and stock prices have continued to rise with my remarks,” he said.

Monetary policy has become an issue for smaller parties trying to compete against the LDP and the DPJ.

The Japan Restoration Party and Your Party on Nov. 15 agreed on common campaign pledges for the Lower House election, including revisions to the BOJ Law and conclusion of a government-BOJ accord on an inflation goal.

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Shinzo Abe (Asahi Shimbun file photo)

Shinzo Abe (Asahi Shimbun file photo)

  • Shinzo Abe (Asahi Shimbun file photo)

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