Bank of Japan Preview

April 6, 2010

This week’s meeting of the Bank of Japan Policy Board, which ends Wednesday, is squeezed between a meeting three weeks ago when fixed-asset operations to provide short-term liquidity were doubled to 20 trillion yen and another at the end of April when new semi-annual price and growth forecasts will be unveiled.  Those other meetings dwarf the importance of this week’s.  The monetary authorities are still getting bugged by government officials to take greater action against deflation and are in fact split internally over that requestPolicy will not get changed this week, and chances are in fact good that the BOJ will upgrade its economic assessment.  In March, the government raised its assessment for the first time since July 2009 and claimed Japan’s economy is picking up steadily, but the central bank’s view stayed at “economy is picking up.”

Released data since mid-March put Japan’s recovery on sturdier ground.  The manufacturing purchasing managers index was 52.4 in March, its ninth print above the 50 expansion-or-contraction line.  The service-sector PMI advanced 3.7 points to 48.3, and the composite PMI index finally edged above 50 to 50.3.  The volume of customs exports were 46.0% greater in February than a year earlier, accelerating from 12-month gains of 41.3% in January, 14.7% in December and minus 1.5% in November.  Japan’s all-industry index leaped 3.8% in January, nearly three times more than forecast.  The activity of services and industrial output increased similarly by 2.9% and 2.7%, while construction shot up 17.3%.  Auto output shot up 74.9%.  Retail sales grew faster than expected, and unemployment held at 4.9%, lowest since March 2009.  The Shoko Chukin index of sentiment among small businesses printed at 45.8 in March, up from average readings of 41.8 in January-February and 42.3 in 4Q09.  The diffusion indices for whether business conditions are more or less favorable reported in the Bank of Japan’s own quarterly survey showed clear further improvement between December and March, plus firms are looking for sales and earnings to advance 2.1% and 12.6% in the coming financial year and for investment spending to dip hardly at all after plunging around 18% last year.

A business cycle upturn is not good enough for Japan, where real GDP in the eleven years between 1998 an 2009 expanded only 0.6% per annum on average including negative growth of 1.2% in 2008 and 5.2% last year.  Deflation has returned.  National consumer prices show on-year drops of around 1.2%, and the Tokyo comparisons are close to negative 2%.  Winter bonuses were 9.3% smaller than a year ago, a record drop.  The monetary base over which the Bank of Japan exerts most control posted diminishing on-year gains of 7.5% in the second quarter of 2009, 5.6% in 3Q, 4.0% in 4Q, 3.1% in 1Q10 and 2.1% last month.  Japan has pushed the fiscal envelope as far as it can be stretched.  For the first time since fiscal 1946, the government will borrow more money than it raises in taxes this financial year.

The March 17 vote to increase fixed-rate operations via three-month tenders at 0.1% conducted twice weekly drew dissenting votes from Noda and Suda in a 5-2 vote.  Their reluctance to take that modest liquidity-enhancing step reflects institutional disbelief among BOJ staff that the experience with substantial quantitative easing in 2001-6 created more good than harm, and Governor Shirakawa has gone to considerable lengths to deny that what the BOJ has done lately even constitutes a form of quantitative easing.  Viewed from that standpoint, the BOJ did far less than other central banks to support growth after the world recession hit, for it only cut its overnight target rate by 40 basis points in total from 0.5% to 0.1%, with the easing implemented in two trivial steps of 20 basis points each in October and December of 2008.  To be sure, monthly buying of JGB’s by the central was increased to Y 1.8 trillion, but officials have recently resisted increasing such any further or lengthening its short-term liquidity provisions beyond three months.

Paradoxically, Japan’s foot-dragging approach to monetary stimulus has left the stance looser in the long run than if officials been more aggressive.  The most remarkable fact about the Bank of Japan is that its target rate for overnight uncollateralized money has not exceeded 0.5% since September 1995.  The time difference between Tokyo and New York is now 13 hours, not 14 hour as such is when the U.S. is on standard time.  Nevertheless, the BOJ’s policy decision did not flash over the wires on March 17 until 00:49 a.m. in New York.  When there is dissent among policymakers, deliberations tend to last longer.

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

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