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Japan's next prime minister wants to end central bank independence

24 Dec 2012 by Jim Fickett.

From the Financial Times:

Shinzo Abe, Japan’s prime-minister-in-waiting … said he had explained to Masaaki Shirakawa, BoJ governor, the importance of replacing the bank’s current “goal” of achieving a 1 per cent annual increase in consumer prices with a “target” of a two per cent rise. …

“If, regrettably, that does not happen, then we will revise the BoJ law and put together an inflation targeting accord [between the government and central bank],” Mr Abe said on Sunday. …

Sceptics say that by forcing the BoJ to print money to fund a huge planned programme of public works spending, Mr Abe is putting at risk long-term faith in the solvency of a state that already has gross debt equivalent to more than 200 per cent of national gross domestic product.

Mr Shirakawa, the BoJ governor, has warned that “monetising” government debt could undermine confidence in Japan’s fiscal discipline, resulting in higher interest rates that would make it much harder to finance the deficit.

However, Mr Abe has already made clear that Mr Shirakawa will be replaced when his current term as governor ends in April and that his successor will be a candidate more willing to push aggressive easing. “We want to have someone who supports our thinking,” he said on Sunday.

Who knows what Abe is really thinking. But note that with the population aging, and pension funds now net sellers of government bonds, it may be that central bank purchases will be the only way to fund the large government deficit. If the BOJ starts printing large amounts of money in order to fund the government deficit, Abe may get much higher inflation than he bargained for.