Bank of Japan Tinkers With Policy Only Cosmetically

April 7, 2009

After a five hour, 48 minute meeting over two days, the 8-person Policy Board voted unanimously to undertake just some small collateral-expanding changes such as the acceptance of loans on deeds to municipal governments.  The uncollateralized overnight call rate target remains at around 0.1%, where such has been since December and just 40 basis points below its cyclical peak.  This rate has not been higher than 0.5% since September 1995.  Like the Fed, Bank of Japan officials always intended for ultra-low target rates to be lifted as soon as the emergency ended.  Officials hope that by broadening collateral, smaller banks will be more inclined to lend, but today’s action raises the total by less than 5% and is unlikely to impact the economy in a discernible way.  Officials conspicuously did not increase their monthly purchase of JGB’s beyond Y 1.8 trillion, nor did they introduce any further significant quantitative easing policies.

The insignificance of the policy changes contrasts with a pretty dire statement.  While economic conditions have deteriorated significantly since January and are expected to remain poor just ahead, the view remains that a recovery will begin in the second half of the current fiscal year, that is after September.  Compelling reasons for retaining its baseline optimism are not offered, and officials concede that the stability of expected inflation and return of actual inflation to positive ground after an interval in sub-zero territory will depend critically on an economic recovery starting later this year.  Officials essentially are punting the responsibility for all this to fiscal policy and a spontaneous improvement in net foreign demand.  The plan going forward is more prayer than policy.

The Policy Board meets next at the end of this month, when new semi-annual growth and inflation forecasts will be unveiled.

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



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