Bank of Japan: No Changes Yet

October 14, 2009

After meeting for seven hours and nine minutes over two days, the Policy Board of the Bank of Japan voted unanimously again to retain a 0.1% target for the uncollateralized overnight call money rate.  This rate target first fell to as low as 0.5% in September 1995 and has never exceeded that level in the ensuing fourteen years.  Like many central banks at present, the Bank of Japan had every intention in 1995 and often since of reestablishing normal rate settings far sooner.  However, having survived on the intravenous feeding of ultra-low rates, Japan’s economy lost its tolerance for surviving without that crutch.  One of the big uncertainties to be revealed in the United States and Europe is whether they too will prove to be over-sensitive to the unwinding of quantitative easing and increasing central bank rates.

The Bank of Japan made only two rate cuts in the present easing cycle, each of 20 basis points administered in October 2008 and December 2008.  The central bank also set up a number of facilities to ease corporate finance strains, buying commercial paper and corporate bonds for example. Although today’s central bank statement upgraded the overall economic assessment and the view on business investment, no remarks were included in the released communique on whether any and which elements of quantitative easing might be allowed to lapse in December.  Speaking at a subsequent press conference, Governor Shirakawa downplayed that omission and suggested that a partial exit is indeed probable then.  The formal statement, however, is only guardedly upbeat.  Risks to growth and inflation remain weighted to the downside, and on-year inflation will remain negative for quite some time longer.  The return of deflation clearly moves the timing of any rate hike well into the future.  As for special support to promote corporate financing, Bank of Japan officials conceded that while conditions have eased for larger firms, the smaller ones still face strains.  It therefore appears that officials are taking a wait and see approach on whether quantitative easing is indeed reined in after December, and final decision will be contingent on future data trends and market conditions.  Long-time watchers of the Bank of Japan know that one should watch what the central bank does and take what officials say with a pinch of salt.

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



Comments are closed.