Takehiro Sato addressed the Japanese business community earlier this week with a message of central bank readiness. He mentioned that the Bank of Japan is prepared to inject further stimulus into the economy if the economic recovery shows signs of a reversal. This sudden change in the direction might come about the increasing threats to global growth. Ironically the International Monetary Fund sees three major risks: The US Federal Reserve quantitative easing tapering program, the China economic slowdown and the Japanese monetary policies.
The Bank of Japan is highlighting the US Fed and the Chinese economic risks as two of the major threats to the Japanese economy. On the local political front the weekend gave Shinzo Abe an expected win for his party the LDP and the coalition he leads. This vote of confidence is welcomed although due to the fact it is still the coalition that has the majority and not the LDP limits the scope of his “third arrow”. The third arrow in his approach to getting Japan out of two decades of stagnation is deep structural reform. Inflation is the major economic indicator to which to gauge recovery as Abe himself has put so much emphasis on it. He has pledged to increase inflation to 2% in a 2 year timeline. The timeline has been expanded. The Bank of Japan board is divided on the actual percentage and the timeline, but they are optimistic they can deliver somewhere close to that level.