November 16, 2001	Friday	Shaba'an 29, 1422

TOKYO, Nov 15: The Bank of Japan (BOJ) started a two-day policy-setting meeting on Thursday, facing calls by politicians for tougher action to ward off a vicious cycle of falling prices, weak demand and crumbling output.

With recent data suggesting Japan has already sunk into its deepest recession in more than 20 years, concerns are growing that a two-year fall in prices could make matters worse by dragging the country into a deflationary spiral.

But analysts doubt the BOJ board meeting will lead to any changes in Japan’s ultra-easy monetary policy which has already effectively driven interest rates to zero.

I don’t think the BOJ will change monetary policy this time, said Kenji Arata, analyst at MCM Asia Pacific.

The government, whose fiscal stimulus has been more restrained this year than in the past, hopes to nudge the economy with a three-trillion-yen ($25 billion) extra budget, which on Thursday moved into the home stretch in parliament.

Economics Minister Heizo Takenaka urged policymakers on Thursday to be vigilant on deflation, warning it could spiral out of control into a situation where prices are even more depressed, corporate profits and employment suffer, and overall demand is ultimately further hurt.

We have seen various indicators showing tough economic conditions, so we have to be on alert for the possibility of a deflationary spiral, Takenaka told the Upper House budget committee on Thursday.

Central bankers have said the BOJ has already done enough, providing ample liquidity and keeping interest rates near zero, and say structural reforms, particularly in the banking sector, were needed for monetary policy to have its full impact.

They have repeatedly pointed out that monetary base, over which the BOJ has more direct control, has grown by double digits in recent months, rising 14.3 per cent from a year earlier in October, while bank lendings have fallen for 46 straight months.

We have taken aggressive monetary easing steps since the spring, and there have been significant effects in the money market, BOJ executive director Minoru Masubuchi told the Upper House budget committee.

However, the effect of the easing has not permeated to businesses and households outside of the financial system.

Arata at MCM Asia Pacific said that as long as share prices held up at current levels, the BOJ would likely wait until December before acting again to spur the economy.

That would be timed with the release of July-September gross domestic product figures, which are expected to confirm a second consecutive quarter of economic contraction, giving Japan technically its fourth recession in a decade.

The government, for its part, has compiled a three-trillion-yen extra budget for the year to next March, which will likely be enacted on Friday after an Upper House vote.

The package, centred on employment measures to help the labour market weather the economic storm and cushioning Prime Minister Junichiro Koizumi’s painful reforms, passed the budget committee on Thursday.

The spending is relatively modest as, like monetary policy, Japan’s fiscal policy has been stretched with public debt already the worst among industrial nations. Koizumi has promised to limit new bond issuance to below 30 trillion yen a year.

But many politicians — mainly old-guard rivals within Koizumi’s own Liberal Democratic Party — have already been calling for a second extra budget.

There is a very large group within the LDP that would like to stimulate the economy further with traditional fiscal stimulus steps, said Michael Wilkins, market strategist at SG Fimat.

If the LDP at large had their way, we would see a relatively good-sized second supplementary budget...and we would see Koizumi holding off on the 30-trillion-yen bond issuance cap basically most of the main platform of his government.

The picture is grim all around. The government on Wednesday downgraded its view of the economy for a seventh time this year, citing flagging consumption and imports as a global downturn gathers force and failing to identify a single bright spot.

That followed a slew of gloomy indicators as the fallout from the hijack attacks on New York and Washington and Asia’s first outbreak of mad cow disease in Japan dampened consumer sentiment and undermined already weak economic activity.

In September, Japan’s jobless rate hit a record 5.3 per cent, while nationwide consumer prices fell for the second straight year and industrial output dropped sharply.

Financial markets appeared sanguine, at least for now.

The Tokyo stock market’s Nikkei average jumped four percent after firming semiconductor prices and bullish US retail data inspired investors to snap up high-tech stocks such as Sony Corp.

Foreign exchange traders were more focused on Afghanistan, and recent successes by the Northern Alliance. On Thursday, rumours that Osama bin Laden had been captured or killed pushed the dollar to a two-week high against the yen.—Reuters