Will Japan's ruling party take yen proposals seriously?
By Tetsushi Kajimoto
TOKYO, April 23 (Reuters) - A group of 130 lawmakers in Japan's ruling party are urging the government and central bank to take aggressive steps to beat deflation, including by pushing down the value of the yen sharply against the dollar.
The group of mostly junior lawmakers from the Democratic Party of Japan want the plans included in the party's campaign platform for upper house elections expected in July.
The proposals, announced on April 13, caused the yen to fall. Here are some questions and answers on whether these proposals will be taken up by the ruling party:
WHAT DID THE LAWMAKERS PROPOSE?
The group of mostly junior lawmakers made the following proposals:
-- Japan should adopt an inflation target of 2 percent to combat deflation currently running at 1.2 percent and seen by most forecasters to last another couple of years.
-- The yen, trading now around 93 yen per dollar, should be pushed down to 120 per dollar, a level it hasn't traded at since 2007. That's a fifth lower than current levels and would mark a dramatic shift.
-- Amend the Bank of Japan law so that the central bank is required to pursue maximum employment in the economy, as the Federal Reserve does in the United States.
-- A leading member of the group went on to demand the BOJ ditch its self-imposed cap to boost long-term government bond purchases from the current 21.6 trillion yen ($231 billion) per year to reflate the economy.
WILL THE PROPOSALS BE ADOPTED BY THE PARTY?
Analysts say the proposals are primarily an effort by the junior lawmakers to be more involved in drawing up policy. The Democrats have centralised policy making since winning last August's election, leaving many party members feeling that they have been excluded from decision making.
They are pressing their case at a time when Prime Minister Yukio Hatoyama is vulnerable and looking to bolster support for the party ahead of the upper house elections.
The Democrats need to win the upper house elections to maintain their dominant position in parliament and avoid policy making from becoming bogged down.
A preliminary draft of the party's manifesto for the elections suggests the group behind the proposals may see some ideas taken up by the party, but only in a very general sense.
The draft on Thursday showed a watered-down version of the proposals. It suggested, for example, that the government and the BOJ should work together to beat deflation by producing inflation as soon as possible - a position already adopted by both institutions anyhow.
It's difficult to gauge the final outcome because the campaign platform is being drafted by three subcommittees of the party, which report to a planning panel whose members include party executives and cabinet members.
Still, the BOJ-related proposals would require major and time consuming legislative changes. Deliberately pushing the value of the yen down would be costly and put Japan at odds with its fellow members of the Group of Seven.
But Hatoyama should nevertheless take note.
'Even if they are not included in the campaign platform, proposals from nearly one-third of the party's members of parliament can't be ignored,' said Takahide Kiuchi, chief economist at Nomura Securities.
WILL PROPOSALS PROMPT MORE BOJ EASING?
Possibly. The government has already succeeded in getting the BOJ to relax its already ultra-loose policies twice since December in the name of fighting deflation.
The proposals add fuel to the anti-deflation rhetoric and provide the government with political ammunition to use against the central bank.
Indeed, Finance Minister Naoto Kan has already said he would not discount the idea of an inflation target. He has been careful to avoid saying explicitly that he wants an inflation target, but his comments have given that impression.
He would face a tough fight though in pressing such a case because the BOJ has bluntly rejected inflation targetting as ineffective.
It prefers instead to define long-term price stability as around 1 percent inflation. A looser definition gives the BOJ more flexibility to manage prices so that it is not swayed by short-term price fluctuations, Governor Masaaki Shirakawa said on April 20.
Kan has also said there is no need now for the BOJ to abandon the cap on purchases of Japanese government bonds, suggesting he would not support the proposal.
The BOJ has been reluctant to boost JGB purchases because it doesn't want to be seen as printing money at the government's behest.
'These lawmakers may be intentionally throwing high balls so that the BOJ will continue its monetary easing. They all know that the central bank easily gives in to political pressure,' said Seiji Shiraishi, chief economist at HSBC Securities Japan.
WOULD JAPAN WEAKEN THE YEN?
A lower yen would be welcomed by Japan's exporters because it would give them more room to compete on price in international markets.
But deliberately pushing down the value of the currency to such a big extent via intervention would be extremely costly to the country's reserves and reputation, especially if investors did not believe it was warranted.
In addition, it would contradict a basic tenet of the Group of Seven that markets should set currency levels, a principle that Kan has repeatedly backed in public comments. It could also cause a diplomatic rift especially as the G7 is trying to push China to revalue its currency.
Kan said he had not heard of the lawmakers' currency proposal.
'The dollar/yen rate may be undervalued at the current level, but I don't think now is the time to talk about any target.' said Koji Fukaya, a senior currency strategist at Deutsche Securities.
'Can Japan seek yen devaluation at a time when China's yuan is under global pressure for revaluation?'
($1=93.44 Yen)
(Additional reporting by Linda Sieg; Editing by Neil Fullick)
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