Bank of Japan Review: Mixed Signals

March 18, 2009

The Bank of Japan, which had thus far from peak cut its overnight target rate by just 40 basis points, kept such at 0.1% rather than revert to zero or switch the operative target from a rate to a quantitative measure like excess reserves.  Officials deliberated for six hours and six minutes over two days.  Half-way through the meeting, an offer to buy up to Y 1 trillion yen (slightly over $10 billion) of subordinated loans to replenish some capital of commercial banks.

A more impressive gesture was announced today and favored by all eight members of the Policy Board.  The monthly quota of JGB’s (government bonds) that the central bank will outright purchase was boosted 29% to 1.8 trillion yen from Y 1.4 tln.  On December 19, 2008, the quota was raised for the first time in seven years from Y 1.2 tln.  In the early days of quantitative easing, officials had lifted the quota from Y 0.4 trillion to Y 0.6 trillion on August 14, 2001, Y 0.8 trillion on December 19, 2001, Y 1.0 trillion on February 28, 2002, and Y 1.2 trillion on October 30, 2002.  After leaving the amount of purchased government bonds unchanged for the next seven years and two months, the quota has been jacked up by 50% within the past three months.  This is an impressive form of quantitative easing.

However, Governor Shirakawa sought to squelch that interpretation of today’s actions, calling it no more than a market-smoothing step, insisting that the intent was not to influence (that is, reduce) long-term interest rates, and implying that further increases in the central bank’s JGB purchase plan are unlikely.  To the Fed’s credit, it’s verbal signals tend to be consistent with its actions.  When the ECB began cutting rates, officials there accentuated residual price risks over growth risks, and there have been many instances in the past where verbal remarks by BOJ officials undermined the thrust of their actions.  This is a clearly flawed tactic.  Why take action if you simultaneously say stuff that waters down the potential market impact?  JGB yields initially eased today to 1.285% but rose after the Shirakawa press conference to show no change on the day.

BOJ officials agree that the Japanese economy is in dire straits.  Their statement today said exports are decreasing substantially, domestic demand is weaker, and “financial conditions have remained tight on the whole, despite improvements in issuing conditions for commercial paper and corporate bonds.” Recovery is not seen happening before the fourth quarter of this year or later in light of the high level of uncertainty.

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



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