Bank of Japan Preview

September 6, 2010

The regularly scheduled monthly meeting of the central bank Policy Board is today and Tuesday.  However, an unscheduled meeting just a week ago caved into to mounting political pressure and took the comparatively modest step of introducing a JPY 10 trillion, six-month cheap fixed-interest loan facility for banks to complemented already existing 3-month facilities.  JPY 10 trillion of those were introduced in December 2010 and doubled to JPY 20 trillion three months afterward.  Japan’s economy looks more vulnerable now than then because of the rising yen, which hit 83.59 per dollar on August 24 versus  a quarterly average of 90.73 in 1Q10.  The latest JPY 10 trillion credit facility for banks doesn’t directly address the deflationary rise of the yen and is a smaller percentage extension of such loans than done last spring.  The yen at 84.22 per dollar remains near its cyclical high and pricey against the euro at 108.6. 

There are tougher policy options that the Policy Board has thus far not taken:

  • Returning to a zero interest rate target and quantitative easing, a practice for five years from early 2001 until early 2006.
  • Raising the monthly outright purchase quota of Japanese Government Bonds.  The last such increase in March 2009 to JPY 1.8 trillion from JPY 1.4 trillion was announced when the yen was trading at 96.4 per dollar and 130.6 per euro.  The yen is  14.4% and 20.3% stronger against those units now than then.
  • Currency market intervention.
  • Setting a medium-term CPI inflation target of between 1.5-2.0%, which would mandate progressive easing steps until such a range is close at hand.

Many Japanese economic indicators have been released in the past fortnight.  Customs exports posted another monthly decline in July and were 5.5% smaller than in April.  The jobless rate edged down a tenth to 5.2% in July, but employment was unchanged from a year earlier.  Real household spending fell 0.7% in July from June.  Corporate service prices slid 0.4% in July and by 1.2% from a year earlier.  Motor vehicle output recorded another double-digit on-year rise but a smaller gain in July than June.  Total, core and core-core CPI posted 12-month drops in July of 0.9%, 1.1%, and 1.5%.  The Bank of Japan’s balance sheet contracted by 4.6% in August.  Small business sentiment posted a sub-50 reading of 48.3, with manufacturing at 49.2 and services at 47.5.  The factory purchasing managers index weakened 1.7 points to 50.1 in August, with large drops of export orders of 5.5 points and total orders of 5.6 points.  The non-manufacturing PMI index improved 2.4 points to 48.7.  However, business expectations suffered a 1.4-point drop to 47.4.  Construction orders were 0.7% lower than a year earlier and weaker than forecast.  Housing starts posted a greater-than-anticipated 4.3% on-year advance. 

An embarrassing, unpopular and ill-timed fight for leadership of the ruling Democratic Party has been instigated by Ichiro Ozawa, allegedly very corrupt and a throwback to back-room Japanese politics.  If Ozawa replaces Kan as Prime Minister later in September, two-party democracy in Japan will have suffered a huge setback.  In any case, prospects for fiscal discipline look dimmer as a result of this challenge, however it turns out.  JGB yields on 10-year maturities have risen almost 30 basis points since August 24 but remain 24 basis points below their post-1999 mean of 1.44%.

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



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