While policy makers in the United States, Europe and China intervene to shore up faltering economies, the Bank of Japan stands out for essentially standing by as the world's third-largest economy hovers on the brink of another recession.
Japan's central bank is expected to maintain its conservative course when it wraps up its September policy meeting on Wednesday, despite growing pressures for action amid deteriorating domestic conditions and weaker export markets. "The Bank of Japan has been consistent in disappointing pretty much the entire world for the last 20 years in how cautious they have been," said Doug Porter, deputy chief economist with BMO Nesbitt Burns. "Our view is that more easing is not only justified, it's the right thing to do."
Political pressure on the bank is growing, signalled by a decision to replace two hawks on its board with appointees who have publicly called for further easing. At the same time, the government itself has been virtually paralyzed since losing a censure motion in the upper house late last month. Intent on forcing an election, opposition parties have blocked the government from issuing bonds needed to fund the current budget.
Any effort to mount another fiscal response to the deepening economic malaise would be a non-starter. "The government is basically on course to run out of money in the next month or two if it doesn't borrow anything," said David Rea, Japan economist with Capital Economics.
After a strong first quarter boosted by higher consumer spending and reconstruction work in the tsunami-ravaged northeast, the economy slipped to an annualized growth rate of only 0.7 per cent in the second quarter, according to revised government figures. That was half the preliminary number, and paled beside first-quarter expansion of 5.3 per cent on an annual basis.
Prospects for the third quarter are even gloomier, now that subsidies to boost purchases of fuel-efficient cars have run their course. Vehicle sales fell 11 per cent in August from the previous month, and the output portion of the manufacturing purchasing managers' index plumbed a 17-month low.
Sharply reduced consumer spending will be enough to cause the economy to contract, regardless of global developments, Mr. Rea said.
Yet the central bank will almost certainly have a muted response. That's partly because it still maintains a fairly positive outlook for both the domestic and global economies, even though government and private-sector analysts have already scaled back their projections.
The bank's world view will actually be buttressed by the new stimulus measures from the U.S. Federal Reserve, the European Central Bank's bond-buying strategy, and signals from China's leaders that there will be more stimulus there as well, if needed, to meet growth targets.
In Japan, these steps could "reduce the pressure on the bank to act too, as board members could argue that others have already done enough to ease the global headwinds facing Japan's economy," Mr. Rea said. "They have been fairly upbeat on the international economy. And although that's turning down, they will wait and see a little bit longer as to what happens."
But the waiting game may well be over by the time the bank's policy-setting board next meets in early October. That's when the bank releases its quarterly Tankan survey of business sentiment, which influences bank policy. The mood is almost certain to be darker than the last survey in July.
Still, any further action by the Bank of Japan would have limited impact. Interest rates are already at rock-bottom levels. Even long-term bonds are at record lows. There is no shortage of cheap credit, but little demand for it. The central bank's survey of senior bank loan officers shows that credit has become easier to obtain in every quarter for the past two years. But businesses prefer to pay down debt rather than add more.
The Japanese already have had such an accommodative monetary policy for so long "that anything they might do, like a new credit program, can't have the impact of more than a tweak," said Carl Weinberg, chief economist at High Frequency Economics.
Still, Mr. Rea said, "they're going to need to be seen to be doing something, even if it's arguable how much traction that would gain."