Bank of Japan: More Show Than Substance

May 21, 2010

The Policy Board’s late May meeting, slightly more than six hours of discussions over two days, took the following actions:

  • Left its rate for uncollateralized overnight loans at 0.1%.  The vote was 8-0.
  • Unveiled a framework for 1-year lending to banks against pooled collateral at the overnight rate level.  In turn, banks are obligated to use that money to extend loans to corporations.
  • Promised to contribute consistently to the fight against deflation.
  • Upgraded the economic assessment to from “picking up” to “starting to recover moderately.”  The claim was made that exports and industrial production are increasing on the strength of emerging market high demand.  Consumption is picking up, and the caveat of a severe employment and income situation was deleted.  The view was reiterated that negative core CPI inflation will become less pronounced as slack diminishes and provided that inflation expectations remain steady.

The Bank of Japan statement made no change in monthly bond purchases either, which have totaled JPY 1.8 trillion since being raised from JPY 1.4 trillion 14 months ago.  Officials have refrained from reverting to the massive quantitative easing and zero interest rates of 2001-2006.  Average reserves at the BOJ of JPY 32.78 trillion in fiscal 2004 and fiscal 2005 were far above the required level.  Such averaged JPY 9.02 trillion in the two years to March 2009 and JPY 15.73 trillion so far this year.  In contrast to the Fed, ECB and Bank of England, which slashed their rates during the Great Recession by 500 basis points, 325 bps, and 525 bps, the Bank of Japan’s cumulative easing amounted to just 40 bps, administered in two-20 basis point increments in October and December of 2008.

Japan is lucky to be surrounded by the rapidly growing emerging economies of Asia, which compensate for the relatively muted incremental monetary an fiscal stimulus.  2.7 percentage points of the 4.6% rise of real GDP between 1Q09 and 1Q10 stemmed from net exports, and a further 0.8 percentage points were generated by inventories.  Fiscal policy stimulus augmented GDP by just 0.1 percentage point in that period.  The euro area sovereign debt crisis endangers Japan in two ways, however, first by bolstering the yen and secondly by weakening the economy’s stock market.  From a low of 134.38 per euro last January 11 to a high of 109.52 yesterday, the yen had soared 22.7% against the common European currency in just over four months.  In less than seven weeks since April 5, the Nikkei-225 index has dropped 13.7%.

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



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