Bank of Japan Preview

May 19, 2011

The Bank of Japan today and Tuesday held its fourth Policy Board meeting in the ten weeks since the devastating Sendai earthquake.  On March 14, officials raised their asset purchases by JPY 5 trillion (about $400 billion) to JPY 40 trillion.  On April 7, they broadened the range of eligible collateral for money market operations and introduced a new funds-supplying facility to provide financial institutions in the stricken areas with longer-term funds to support efforts to meet demands for credit.  The last meeting on April 28 released new staff forecast, cutting projected GDP growth in the year to March 2012 to 0.6% from a forecast of 1.6% made in January but lifting projected growth in the following fiscal year to 2.9% from 2.0% predicted previously.  At the April 28 meeting, in addition, a recommendation by Board member Nishimura to boost the asset purchase plan by another JPY 5 trillion to JPY 45 trillion was rejected by the other eight people on the Board.

A pronounced easing of monetary policy right after the earthquake is reflected in the reserves that banks hold at the BOJ, which are now far in excess of what is required.  Such had averaged JPY 16.80 trillion in 2010 and JPY 18.77 trillion per day this year up to March 11, the date of the disaster.  That amount shot up to an average of JPY 37.49 trillion from March 14 through April 7 with a peak of JPY 42.57 trillion on March 24.  Officials have subsequently applied a little less force to the accelerator, with reserves averaging JPY 37.49 trillion from April 8 to April 28 and JPY 30.71 trillion since April 29.  The sum today is JPY 28.66 trillion, which is closer to the year-to-March 11 mean level than to the March 24 peak.

Not all of Japan’s post-disaster data have been shocking.  The March jobless rate of 4.6% was the same as in February, and jobs were only 0.2% lower than a year earlier.  Core domestic machinery orders actually rose 2.9% in March and were 6.8% greater that month than a year earlier.  Core CPI inflation in March of minus 0.1% appears poised to reenter positive territory.

Most Japanese data releases over the past three weeks have been awful, however.  Fourth-quarter GDP growth got revised to minus 3.0% annualized from minus 1.3% reported in March, and first-quarter growth of negative 3.7% was almost twice as poor as feared.  Industrial production plunged 15.5% in March, and capacity imploded by 21.5%.  Japan’s tertiary index, a measure of service-sector activity, fell 6.0% in March.  Consumer confidence dropped from a reading of 40.6 in February, which was already well below the 50 line between optimism and pessimism, to 38.3 in March and a 24-month low of 33.4 in April.  Real household spending sank 2.3% on month and by 8.5% on year in March.  Settlements-basis exports fell 9.4% on month in March and were 1.4% less than a year earlier.  Customs-basis exports in the first twenty days of April were 12.7% smaller than a year earlier in contrast to a 14.2% on-year increase in imports.  As a result, the trade balance swung into a rare deficit.  The composite purchasing managers index, which embodies services as well as manufacturing, slumped to 35.0 in April from 36.1 in March and 51.0 in February.  Construction orders in March were 11% lower than a year earlier.

The Bank of Japan has no scope to cut its interest rate target, which is already at zero to 0.1%.  Quantitative easing using a variety of unorthodox measures and currency intervention are the ways to ease from here.  No doubt, Nishimura will reintroduce his request to raise the asset purchase program.  But strong conservative sentiment runs through the central bank, with lots of suspicion that zero interest rates and quantitative stimulus generate more harm than good.  It would be surprising to see the Policy Board majority agreeing to another increase in the asset purchase program.

Japanese reserves leaped by $50.7 billion between February and April, and officials have managed to keep the yen trading on the weak side, but close to, 80 per dollar.  The last thing the economy needs is further yen appreciation.

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



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