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BoJ pushes Abe to further reforms

Japan risks low economic growth even as policy easing spurs inflation, the Bank of Japan Deputy Governor Kikuo Iwata said in a speech yesterday. He underlines that the GDP growth can't be achieved only through the monetary policy, it is also a task of the government. 

“The BOJ is stepping up its rhetoric to push the government to raise Japan’s potential,” RBS economists say. “Iwata is basically saying that the BOJ is achieving results, so now it is time for the government to show its commitment to ending deflation.”

Japanese economic growth hit a 2-year high of 5.9% y/y in Q1. First-quarter growth was mainly driven by spending increase before the April 1 sales-tax hike. However, GDP is forecasted to contract by 3.4% y/y in Q2 as consumers cut back the purchasing.

The BOJ’s stimulus helped lift core inflation to +1.3% in March 2014 from -0.4% in April 2013 when the central bank started easing a campaign of policy easing. However, it’s not all so simple. “The BOJ is aware that if the government doesn’t make efforts on this, the public may start to complain about the inflation policy,” analysts at Bank of America Corp. in Tokyo explain.

Japan’s Prime Minister Shinzo Abe is currently preparing for the next phase of Abenomics. Many market participants fear that the so called Third Arrow of the government’s growth strategy has got “lost in flight”. Investors would like the planned economic restructuring to result in higher wages growth, helping the consumers to withstand the rising prices. The core question these days is whether the Abe's strategy will be really effective. 


Image: Japan's prime minister Abe


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