Bank of Japan Preview

March 16, 2010

Japan’s  Democratic Party government wants the Bank of Japan to take more forceful action to resist deflation.  Core and headline consumer prices each fell 1.3% in the year to January.  Nominal GDP was 8.0% lower last quarter than two years earlier, and the GDP price deflator contracted 2.8% between 4Q08 and 4Q09.  Bank loans are down 1.6% from a year ago, and M1 and broad liquidity grew merely 1.1% and 0.9%.

Since Japan’s asset bubble began to burst around twenty years ago, the Bank of Japan has earned an institutional reputation for countering deflationary pressures too lightly and too late.  Bank officials reject the premise that deflation and inflation are purely monetary phenomena and believe that their experiment with heavy quantitative easing from 2001 to 2006 did damage to money market functionality and had a limited effect on real activity and inflation.  After an unscheduled Policy Board meeting at the beginning of December, the Bank of Japan announced a new program to loan Y 10 trillion to commercial banks at 0.10% but for only three months.  Markets interpreted such to be a cosmetic, inconsequential gesture to get the government to bug off for a while.

Coming into this week’s meeting, market players have been alerted through various leaks to expect more steps against deflation now.  The question, as always, is whether these will be meaningful.   Will a strong signal be sent that no rise of interest rates is going to happen for a very long time, say before mid-2011?  Will officials take the step of preannouncing no tightening until certain litmus tests for inflation, nominal GDP growth, and money and credit growth are met?  Might intervention be resumed?  A reasonable action would be to increase the current monthly quota of outright Japanese Government Bond purchases, which is presently at Y 1.8 trillion.  And if officials really want to impress markets, a return to the heavy quantitative easing of several years ago is an option that would pack a huge element of surprise.  A decision will be announced around 04:00 GMT on Wednesday.  My bet is that markets will be left disappointed as they usually are.  Japan’s economy has recovered enough for the government to upgrade its assessment for the first time since September, so this seems an odd time for monetary officials to pull out all the stops.  Stay tuned…

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.



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