Under siege, Japan central bank wakes up to ‘Abenomics’

Within a day of Shinzo Abe's Liberal Democratic Party sweeping to power in elections this month, elite bureaucrats in Japan's central bank rushed to ready what amounted to a surrender offer.

Abe had run his campaign with a relentless focus on economic policy and had called on the Bank of Japan (BOJ) to take drastic steps to end the nation's long bout of deflation, or else face a radical makeover at the hands of parliament. The vote had become an unexpected referendum on the BOJ itself, and the bank had lost.

Senior officials concluded that to preserve the BOJ's scope to act in a future crisis, it needed to move quickly to show it recognised reality, according to people familiar with the hurried deliberations. Abe had won a mandate for more forceful monetary easing, and Japanese taxpayers were frustrated with an economy slipping back into its third recession in five years.

"The LDP's win was just too big, and it won an election calling for a 2 percent inflation target. If that's the will of the people, the BOJ must respect that," said a source familiar with the central bank's thinking. "Otherwise, the BOJ could lose everything, including its independence."

The central bank is now on track to pump ¥120 trillion ($1.4 trillion) into the economy — equivalent to the value of six Googles — even though skeptics argue that this tide of money cannot break Japan's real economic logjam: falling wages.

Instead, the skeptics say, the risk is that investors would end up concluding that Japan needed the central bank to cover its debts — a recipe for a selloff of government bonds, which already amount to twice the size of gross domestic product.

But after Abe's landslide election victory — and years of limited money-printing having failed to revive growth — senior BOJ officials wanted it understood they were ready to join the experiment in what media and investors called "Abenomics", a potentially high-octane mix of fiscal and monetary stimulus.

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