Japan to ease monetary policy further – Reuters

Posted on March 19, 2011 by

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Nouriel Roubini, best known for predicting the U.S. housing meltdown, said he expects Japan‘s central bank to ease monetary policy further by buying more government debt in the wake of the earthquake.

Roubini, one of Wall Street’s most closely followed economists, said the Bank of Japan (BoJ) would have to set aside more money to buy bonds from the government to help pay for Japan’s reconstruction works.

The BoJ’s future purchases of government bonds, also known as quantitative easing (QE), are likely to be larger than the amount that was unveiled this week, Roubini said on the sidelines of a conference in Beijing.

“They have already done QE I, QE II, now there will be a third round, and the third round might be larger than the smaller amount of quantitative easing that they have done so far,” he told Reuters.

The BoJ doubled the cash it sets aside for buying assets such as government bonds on Monday to 10 trillion yen ($124.1 billion) in an emergency move to shore up confidence in crisis-stricken Japan.

That was the second round of quantitative easing unveiled by the BoJ since October, when it first set aside a pool of 5 trillion yen to buy assets to partly rein in the yen.

“They need their massive fiscal stimulus for rebuilding, but they are starting with a very large public deficit and with a very large stock of debt,” Roubini said.

“Once their deficit becomes much larger, and they need it to build parts of the country that are damaged, then the BoJ is going to be starting another round of easing – QE III,” he said.

Analysts have estimated that the earthquake and nuclear emergency could cost Japan up to $200 billion, or about 4 percent of its gross domestic product.

Such a bill would strain Japan’s already fragile fiscal health. Its government is one of the world’s most indebted. The public debt is twice the size of the $5.3 trillion economy, and the fiscal deficit is about 9 percent of GDP.

But Roubini said massive reconstruction spending could lift Japan’s economy later this year, jolting it from a slump in production in the near term caused by factory shutdowns in the aftermath of the quake.

That means the world’s third-largest economy could escape a recession, he said.

“If they start the reconstruction fast enough, the policy stimulus might lead to a recovery of growth,” Roubini said. “There are downside risks to Japanese growth, but I would not necessarily predict another real recession for now.”

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Posted in: APAC