Bank of Japan Preview

March 16, 2009

Press reports in Japan have surfaced that the Bank of Japan, which meets Tuesday and Wednesday, may boost the Y 1.4 trillion quota on its monthly purchases of JGB’s and that other actions will be announced to alleviate the corporate credit squeeze.  Bank officials continue to resist cutting their 0.1% overnight money rate target to zero and unveiling a target for excess banking reserves.  At the last meeting on February 18-19, officials agreed to purchase Y 1.0 trillion of corporate bonds, expanded some special fund-supplying operations, extended temporary liquidity-pumping actions beyond the March 31st fiscal yearend and broadened eligible collateral that it will accept.

When the world credit crunch began, the BOJ target rate was only 0.5%.  After cuts of 20 basis points on October 31st and December 19th of last year, the rate is 0.1%, but its peak-to-trough drop of 40 basis points is dwarfed elsewhere in the G-20 by declines of 525 basis points in Britain, 513 bps in the United States, 275 bps in Euroland. Without adopting a quantitative target, the central bank has allowed bank balances held with it to climb to Y 12.5 trillion on average since the beginning of February from Y 10.4 trillion in January, Y 8.7 trillion in 4Q08, Y 8.0 trillion in 3Q08 and Y 7.8 trillion in the first half of 2008.  During the experiment with quantitative easing in 2001-6, the target got as large as Y 30-35 trillion.

Japanese fiscal policy has been stymied.  Prime Minister’s cabinet has proposed two stimulus package, but only about a fourth of such has been implemented.  Aso’s approval rating fell below 10%, and much of the fiscal support remains bogged down in parliament, where opponents of the LDP control the Upper House.  Lower House elections must be held by September.  A strong yen, meanwhile, has tightened monetary conditions along with banks’ reluctance to lend.

In February, the Bank of Japan released an assessment of economic conditions and prospects that was as bearish as such has ever been including the worst moments of Japan’s lost decade.  Conditions were said to have deteriorated significantly.  Actual data back up the pessimism.  Real GDP fell a revised 12.1% at a seasonally adjusted annual rate (saar) last quarter, with exports and investment plunging by 44.9% saar and 19.8%, respectively, and consumption fading 1.7%.  The latest readings of construction orders (down 38.3%) and housing starts (off 18.7%) suggest that residential investment (a rare bright spot last quarter) has swung into the red.  Auto sales are more than 30% below year-ago levels, and new job offers have fallen 18.4% y/y.  The manufacturing and service sector PMI’s are both below 35.  Consumer confidence is weaker than 30, and the Economy Watchers’ index is lower than 20.  A score below 50 denotes weakness in all of these measures.  Corporate profits have plummeted 64% on-year.  In the year to January, industrial production fell 31%, and the ratio of inventories to shipments soared over 51%.  Core domestic machinery orders have posted a 12-month drop of 39.5%, and foreign orders decreased 71.2%.  Core consumer prices declined by 3.1% at a seasonally adjusted annualized rate between July 2008 and January 2009, while wholesale prices are showing on-year declines of 2.2% for services and 1.2% for goods.

Not by coincidence, the country that has been there (a deflationary state) and done that, namely Japan, has the economy most at risk for future deflation.  It would be nice to see the Bank of Japan attack the problem in a less incremental way.  I would have expected a full return to quantitative targeting for reserves to have been leaked if that were under serious consideration now.  Yen intervention, on the other hand, works best when sprung as a surprise as we saw in Switzerland’s case last week.  G-20 finance ministers promised yet again not to pursue a path of protectionism.  It could be awkward to announce or conduct intervention so soon after that meeting and with Japan’s currency well off its 2009 highs.  Stranger things have happened.

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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