BOJ looks set to back 2% inflation

Bank’s apparent readiness to adopt Abe’s target seen as compromising its independence

The Bank of Japan is expected to modify its monetary easing campaign this week with a 2 percent inflation target after being driven into a political corner by Prime Minister Shinzo Abe, who has put priority on beating chronic deflation.

But it remains to be seen whether the BOJ can act aggressively enough to satisfy the new Abe administration because the central bank apparently has few conventional policy weapons left in its arsenal and little hope of accomplishing the feat with monetary policy alone in any stable way.

If the independent BOJ loosens its monetary grip at the two-day meeting starting Monday, it would be the first time in more than nine years it has done so in two consecutive policy meetings, signaling a drastic approach.

BOJ expands asset purchase program – inflation target unchanged

Asia Wrap Thursday 20 Dec. 2012:

• The BOJ expanded its asset purchase program by Y10Tr, but delayed any commitment to a new inflation target for discussion at its January meeting

• New Zealand Q3 GDP +0.2% (vs. +0.4% expected)
• New Zealand December ANZ Business Confidence falls to 22.7 (vs. 26.4 in November)
• Australia: The RBA slowed its pace of $A sales in Nov. to A$117 million (outright AUD sales lowest in 5 months), revealed the December Quarter RBA Bulletin
• Australia: Treasurer Swan said a budget surplus this year was “unlikely”,  effectively dumping the government’s commitment to the surplus

Swan has dumped the surplus commitment – Surplus “unlikely”:

• Lower tax revenues blamed: lower corporate profits
• Government spending has been restrained
• Terms of trade lower
• Weak global economy
• Strong budget position still
• Inflation is contained