The Bank of Japan’s 5 trillion-yen ($62 billion) asset-purchase fund is too small and ought to be as large as 100 trillion yen to rid the economy of deflation, according to Citigroup Inc. Chief Economist Willem Buiter.
“Japan will likely need ‘helicopter money drops’ to ensure a full escape from the Great Deflation,” Buiter and other Citigroup economists including Tokyo-based Kiichi Murashima said in a note to clients dated Oct. 28. “The scale of the quantitative easing that is required is an order of magnitude larger than what has been announced.”
The Bank of Japan’s inflation forecast shows it won’t meet its own guidelines for price stability, a prediction that signals policy makers may need to add further money into the economy. The central bank on Oct. 5 pledged to keep a “virtually zero rate policy” and created the fund to purchase assets including corporate bonds and exchange-traded funds.
“The 5 trillion-yen additional quantitative easing announced recently by the BOJ is far too small to achieve anything,” the economists said. “Given the worse circumstances of Japan, 100 trillion would be more appropriate.”
The BOJ yesterday brought forward the date of its next policy meeting to Nov. 5, a move which could accelerate stimulus to the economy. Governor Masaaki Shirakawa said the dates of overseas events including the Federal Reserve decision on Nov. 3 weren’t behind the BOJ’s move to reschedule its meeting from Nov 15-16.
The Citigroup economists also said that Japan is “in trouble” because of the scale of its government debt.
“We think Japan’s unsustainable fiscal situation needs to be corrected soon either by monetizing government deficits and debt or by generating sustained primary budget surpluses,” they wrote. “Failure to act could plunge Japan into a sovereign debt crisis.”
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