Guess Who's Coming to Dinner

Japan's central bank met on Friday and decided to leave its policy stance unchanged. This wasn't  surprising, given that its key policy rate was already set in a range of zero to 0.1 per cent, and has not been higher than 0.5 per cent for over a decade. Also, the Bank did not add to its quantitative easing program beyond the expansion announced just last month (see my posting Asian Dysfunction). But, for the first time in about a decade, a government Minister, in this case, Economics Minister, Seiji Maehara, attended the central bank meeting, apparently to urge even more aggressive monetary stimulus. Japan's "recovery" over the past year, which principally reflects rebuilding from the earthquake and tsunami, is stalling - again. Underlying domestic demand remains dormant. And exports are falling, as growth in China (now Japan's largest trading partner) slows, and debt-ridden Europe slips into recession. A row with China regarding the Senkaku Islands (or, as China calls them, the Diaoyu Islands) could hardly have sparked at a worse time. And, despite all this, the yen remains strong, which makes Japanese exports relatively expensive in world markets. (Here's a quick primer to explain this apparent anomaly - deflation in Japan means that real interest rates, as distinct from near-zero nominal rates, are positive, whereas real rates in, for example, America and Britain, are negative. Thus the relative attraction of the yen.)  Perhaps not surprising, then, that the government, which must call a general election sometime in the next few months, sent along one of its cabinet ministers to the Bank of Japan's monthly meeting.

One further update - which speaks to the sclerotic nature of Japanese politics. The Liberal Democratic Party (LDP), which ruled for decades but is currently in opposition,  just revealed its choice to lead the Party into the upcoming general election. He is Shinzo Abe, a nationalist former prime minister, who lasted a full 12 months in 2006-07 amid scandal, ineptitude, and personal health issues reportedly induced by stress. Mr. Abe's principal focus as Prime Minister was to openly, and as frequently as possible, deny that women of Asian neighbors were forced to act as sex slaves to the Japanese army during World War II. Does Mr. Abe's revival look just a bit like an act by the LDP of snatching defeat from the jaws of an otherwise likely victory?