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Monday, November 13, 2006

Monetary Squeeze Hurting Japan

Well I hope young Claus is busy dusting-off his best suit, because someone somewhere should be thinking of giving him a prize, since against all odds he has been consistently in the right on Japan.

Now of course the big guns are starting to wade-in, since reality is impossible to ignore forever, and today it is the turn of Heizo Takenaka, described by the FT as the "architect of the previous administration’s economic policy":

Mr Takenaka, a former financial services minister often credited with laying the foundations for Japan’s current recovery, said the BoJ was rushing to normalise monetary policy.

“It will take two or three years to normalise the situation,” he said. “But the BoJ is too urgent, too rapid.”

Since March, when the BoJ ended its ultra-loose monetary policy, the central bank has been draining liquidity, and in July it raised interest rates to 0.25 per cent, the first increase in six years.

Mr Takenaka said it was premature to squeeze money supply so aggressively when prices, as measured by the gross domestic product deflator, were still dropping 0.8 per cent a year. “Who is responsible for that?” he said. “Is the government responsible for that? Are companies responsible for that? No. The BoJ is responsible for that.”

The outspoken Mr Takenaka, who has returned to academia since leaving the government in September, has been a long-time critic of the central bank. But his latest attack is particularly blistering in linking the current economic slowdown with BoJ policy.

Third-quarter GDP numbers, due out on Tuesday, are expected to show the economy is weak or even contracting. On Friday, data showed machinery orders slipping 7.4 per cent from the previous month, sparking concern that companies might be cutting capital spending. “We cannot ignore the poor BoJ management of monetary policy [in this],” Mr Takenaka said.

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