A Modest BOJ Stimulus

March 17, 2010

After meeting for five hours and 57 minutes over two days, the Bank of Japan Policy Board took two votes that resulted in

  • A unanimous 7-0 decision to leave the uncollateralized overnight rate at 0.1%.  Such has been 0.1% since December 2008, merely 40 bps below the prior cyclical high of 0.5%.
  • A 5-2 vote, with Suda and Noda dissenting, to double fixed-rate funds-supplying operations to 20 trillion yen.  This facility was introduced 3-1/2 months ago and consist of 3-month loans to commercial banks against pooled collateral at 0.1% done in increments of 800 billion yen each twice weekly.  Their intent is to spur credit growth and to hold down longer-term interest rates.  When announced initially, the 10-year JGB yield was at 1.20%, lower than now.  Money and credit growth in January-February were weaker than in 4Q09, but the yen has softened from 86.13/$ at the beginning of December.

The Bank of Japan is doing these operations in response to escalating political pressure for monetary officials to do more to counter deepening deflation, but the enthusiasm behind the central bank’s action was undercut at Governor Shirakawa’s press conference, when he denied the move constitutes quantitative easing and stuck to the Bank’s view that deflation cannot be ended by the central bank.  Indeed not.  Japan is seemingly in a liquidity trap, with a disconnection between low interest rates and credit and money growth.

The Bank of Japan did not change its monthly economic assessment.  The view is that modest, policy-dependent growth now will kick into a higher gear after September with export strength trickling down to private domestic demand.  On-year declines in consumer prices are forecast to diminish eventually as slack in the economy is reduced. Right now, while the economy is “picking up,” headwinds continue from declining public investment, severe employment and income situations, and some lingering severity in the financial environment.  Business investment is only bottoming out, but consumption especially of durable goods has improved.

In short, the Bank of Japan did nothing surprising and is more noteworthy for what has not been done, like increasing its outright JGB buying, going back to the quantitative monetary policy of 2001-6, or making a pledge to keep short-term rates at 0.1% of lower until CPI inflation exceeds 1.0% on a sustainable basis.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary redistribution without express permission.



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