Nikkei sends a warning shot across the bow

Nikkei’s lead editorial today discusses a meeting this week between Prime Minister Abe and BOJ President Fukui.

The meeting itself was uneventful, but Nikkei uses the occasion to warn of undue political pressure by the government on the BOJ in advance of the 2007 elections. It concludes with a call for the government to respect the Bank, saying, “The ideal is that the government respects the central bank’s independence and discretion, and the central bank provides reliable medium-term monetary policy management to the nation and the market. In order to move slightly closer to this ideal, the Bank of Japan and the government must both exert considerable effort.”

Nikkei’s warning may be anticipatory, rather than based on any specific government policy (as I discussed here, Finance Minister Omi Koji has made supportive statements regarding the BOJ’s intentions to raise interest rates before year’s end). But as the elections get closer, and if Abe’s popularity numbers continue to fall, the temptation to tamper with economic management for short-term political gain could prove irresistible.

The editorial further warns the BOJ to assess economic conditions carefully before raising Japan’s interest rates, noting that current international and domestic economic signals are mixed — and the biggest question, that of whether the US economy will have a “soft landing” remains unanswered. So while Nikkei doesn’t come right out and say that the BOJ shouldn’t raise interest rates, there is a very strong undertone throughout this editorial that suggests that all parties involved in the management of Japan’s economy need to think very carefully before acting and not act rashly, lest the authorities scupper the longest boom in Japanese history.

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