Abe’s election campaign puts BOJ policy in the back seat

Reuters: The Bank of Japan was once at the centre of Prime Minister Shinzo Abe’s audacious reflationary drive, but with little to show for three years of massive stimulus it finds itself sidelined ahead of upper house election this weekend.

Even as a strong yen keeps the central bank under pressure to ease monetary policy, the confusion sown by its unexpected shift to negative rates in January has seen it shunned by the government, which wants to shift the focus to fiscal stimulus.

“I don’t think it was wrong to adopt negative rates,” said Masahiko Shibayama, an influential aide to the prime minister.

“But looking at what has been happening, there’s no doubt it was poison,” he said, referring to the policy’s deep unpopularity among markets and the public.

Monetary policy was lauded as one of the “three arrows” of “Abenomics” - the nickname given to Abe’s bold campaign announced in 2012 to beat deflation - with fiscal stimulus and structural reforms the other two arrows.

Haruhiko Kuroda got straight to work as BOJ Governor after Abe handpicked him for the role in 2013, unleashing a massive money printing exercise designed to get inflation to 2 percent in two years.

But with inflation now nowhere near that target, politicians seem happy to avoid the topic of monetary policy altogether.

Kenji Nakanishi, an election candidate for Abe’s ruling Liberal Democratic Party (LDP), told Reuters he sees no need for the BOJ to top up stimulus in the near-term.

“If we advocate aggressive easing, that could be taken as calling for further stimulus. That’s not the case,” said the former commercial banker, adding that voters remain unsure about how negative rates could help the economy.

Abe is casting the July 10 election for half the seats in the 242-member chamber as a referendum on Abenomics as doubts over whether the strategy is working grow.

Abe needs his ruling coalition to win a majority of the seats up for grabs to keep party members in line. His mandate would be further strengthened if his party alone wins a simple majority, LDP’s first since 1989, allowing him to say Abenomics has won public endorsement.