More Stimulus from the Bank of Japan Seems Inevitable

April 6, 2011

Less than two weeks after the Tohoku – Pacific Ocean earthquake, Japan’s government released a preliminary study that estimated JPY 16 – 25 trillion of damage to human capital, housing, plant and equipment.  At the high end, a drag of 1.5% of GDP is foreseen in fiscal 2012.  The operative word is “preliminary.”  These are early days, so the figure has a big margin of error and could go higher.

At a meeting on March 14, the BOJ Policy Board decided to easy policy significantly, voting to promote a zero to 0.1% call rate through the provision of ample liquidity to meet whatever financial markets need and raising planned asset purchases by another JPY 5 trillion.  The stimulus is discernible in a rise of the BOJ balance sheet from JPY 129.4 trillion to JPY 149.8 trillion between February 20 and March 20.  It can also be observed in the current account balances that Japanese banks hold with the central bank.  When massive quantitative easing was utilized to counter deflation between April 2002 and July 2006, such had averaged JPY 27.3 trillion daily.  That figure fell subsequently to JPY 8.1 trillion on average in 2008, then during the Great Recession increased to annual means of JPY 12.9 trillion in 2009 and JPY 16.8 trillion last year. Prior to March 18, the balances had averaged JPY 19.7 trillion this year and since that date have on average been 41.3 trillion yen.  That’s substantially more stimulus than at the height of QE1.  In March, Japan’s monetary base was 16.9% greater than a year earlier versus on-year increases of 5.5% in January-February and 4.8% last year.  The current account portion of the monetary base leaped to an 88.7% on-year advance last month from 23.3% in February.

The above comparisons underline the current mind-set of Bank of Japan senior officials.  This is no time to wear their anti-inflationary hats as guardians of price stability.  Rather, it’s a time to think like a lender of last resort at a time when destroyed supplier lines are playing havoc with the cash-flow of many companies.  One way to backstop Japanese growth is to foster a weaker yen.  The currency had jumped in knee-jerk fashion after the quake, as investors including yours truly recalled how the Kobe quake had been a key catalyst in lifting the yen during 1Q95.  G7 governments engaged in joint sales of Japanese currency on March 17th in the first concerted intervention of any kind since September.  After spiking to 76.25 yen per dollar, it has retreated 12% to as low as 85.54/USD today, and it has fallen 12.3% from 107.58 per euro on March 17 to a low today of 122.64/EUR.

Japan’s news has not been entirely negative.  Economic momentum for recovery was developing nicely before the natural disasters, and certain recent data releases reflect continue to that.  The index of leading economic indicators, reported earlier today, printed in February at 104.2, up from 101.5.  Industrial production in January was 3.8% above the average 4Q10 level.  Core domestic private machinery orders were likewise 4.3% above their 4Q mean.  The Bank of Japan March corporate survey found conditions and sentiment that were better than anticipated.  Unemployment fell to 4.6% in February from 4.9% in January.  The Shoko Chukin index of small business sentiment rose improved nearly 3 points between February and March. 

But make no mistake, Japan’s is an economy in shock at the moment.  That’s the message of forward-looking purchasing manager surveys released this month.  The manufacturing index dropped to 46.4 in March from 52.9 in February.  The services PMI reading of 35.3 in March reflected a record 14.5-point monthly drop.  The index had averaged 50.1 in January-February and 49.0 in 4Q10.  The composite PMI of 36.1 in March after a January-February mean of 50.9 suggests that GDP is likely to have contracted nearly 2% annualized in the first quarter following a 1.3% annualized decline in the final quarter of 2010.  That means it’s only a matter of time before the declaration is made that Japan has relapsed recession.  In time, there will be plenty of stimulus from the rebuilding of infrastructure, but it is the job of a central bank in such circumstances to bridge the gap until that happens.  Perhaps not as soon as this week but probably inevitably, monetary officials will implement further measures to support Japan’s economy.

The announcement Thursday from the BOJ is likely to hit screens after midnight on the east coast of the United States.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.



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