BOJ Governor Masaaki Shirakawa responded to the critics of the central bank by arguing that the institution must maintain its independence. At press conference following its monthly meeting Mr. Shirakawa stated that history shows the importance of maintaining an independent central bank. The comments were a sharp rebuke to Shinzo Abe, the leading candidate for next Prime Minister in the Japanese election who has been advocating for a much more accommodative monetary policy in coordination with fiscal authorities.

Taking on Mr. Abe’s primary proposal that the BOJ underwrite government debt, Mr. Shirakawa stated that such policy would lead to reckless money printing, adding that no OECD central bank has ever taken such stance. Mr. Shirakawa also noted that setting negative interest rates would discourage banks from seeking funds from BOJ in market operations. Finally Mr. Shirakawa stated that the 3% inflation target proposed by Mr. Abe was unrealistic.

Overall, Mr. Shirakawa’s press conference was a wholesale repudiation of Mr. Abe’s policy proposals sending USD/JPY lower to 81.13 with the FX market viewing BOJ Governor’s remarks as an argument for status quo. Mr. Shirakawa is expected to leave his post in May and one of Mr, Abe’s key policy initiatives is to replace Mr. Shirakawa with a much better ally at the helm of the central bank. For now however, it appears that the BOJ will not cooperate with Mr. Abe should he be elected in December, thus forcing him in order to implement his more dramatic proposals.

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