Bank of Japan Press Conference

January 22, 2009

Bank of Japan officials retained a rate target of 0.1% and released a number of documents that fleshed out several actions to alleviate extremely stressful corporate financing conditions. All of such were as expected.  Monetary officials spoke loudest with new price and growth forecasts, updating estimates made at the end of October.  New point projections are compared below to the old ones.  Fiscal years run from April through March.  The revisions portray a deep recession with a prolonged return to deflation.  Currently exports are decreasing substantially, posting drops in December of 35% from December 2007 and 10.7% from November.  Domestic demand is weakening, and financial markets are getting tighter.  Sub-zero CPI inflation is expected by the second quarter of this year, and no economic recovery is anticipated before 4Q09 at the earliest.  Amid great uncertainty surrounding the baseline forecast, officials would not rule out the possibility that expected inflation slides toward deflation in the medium term, which would be very regrettable.

  FY08 FY09 FY10
GDP-new -1.8% -2.0% +1.5%
GDP-old +0.1% +0.6% +1.7%
Core CPI-new +1.2% -1.1% -0.4%
Core CPI-old +1.6% 0.0% +0.3%
CGPI-new +3.1% -6.4% -0.9%
CGPI-old +4.6% -0.8% +0.3%


Officials from both the Bank of Japan and Ministry of Finance were vocal overnight in warning that rapid moves in the yen are unwelcome and magnifying the recession.  To date, the central bank has lowered its overnight money target from peak by just 40 basis points, whereas the Fed, Bank of England, and ECB have cut their benchmarks by 500-525 basis points, 425 basis points, and 225 basis points.  Japan’s policy recourse would be to return to quantitative easing, which can be gauged by the size of bank current account balances.  The higher such go, the greater is the level of excess reserves.  At the loosest policy stance in 2005, the target for those balances was Y 30-35 trillion, and they averaged Y 32.74 trillion that whole year. In 2008, by comparison, the balances averaged Y 7.79 trillion in the first half and Y 8.13 trillion from the middle of the year through December 19th, when the central bank implemented a second 20-basis point rate cut to 0.1%.  Since that rate reduction, the balances have been higher, averaging Y 10.98 trillion.  Some of that increase may be related to yearend, although the average level was just Y 7.38 trillion on average from December 20, 2007 – January 22, 2008.  In any case, policy remains much tighter than in 2005, even though actual growth and the outlook for economic growth was much better then.  Japanese officials have themselves to blame for the appreciating yen, and their G-7 colleagues will not be fully understanding if Japanese officials sell yen in intervention.

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