Possibility that Bank of Japan Will Expand Quantitative Easing on Tuesday

February 13, 2012

The BOJ monthly Policy Board meeting is being held on Monday and Tuesday of this week.  Fittingly in the face of deflation and perennially soft real growth in Japan, monetary policy there needs to be very accommodative.  Economic conditions worsened in 2011 because of an elevated yen, which hit a record high of 75.55 per dollar in late October and posted a 2011 average of 79.73, Japan’s horrific earthquake last March and the euro debt crisis that weighed on global demand.

Japanese interest rates have been very low for a very long time.  The overnight money rate since early September 1995 has averaged 0.19%.  That was the last time the BOJ had a target interest rate above 0.50%.  The target was cut to 0.1% in December 2008 and to a range of 0 to 0.1% last October 5.  An asset purchase program was raised by JPY 5 trillion in October 2010, by another JPY 5 trillion in March 2011 after the earthquake, by JPY 10 trillion last August and by JPY 5 trillion to to total of JPY 55 trillion in October 2011.  That was the most recent loosening of policy.  A result of the BOJ’s quantitative easing is a massive quantity of excess banking reserves above the required JPY 6.45 trillion total.  Bank balances at the Bank of Japan averaged JPY 31.2 trillion in the second half of 2011 and JPY 31.8 trillion so far this year.

Japanese government bond yields remain very low as well in spite of the largest debt-to-GDP ratio in the Group of Seven.  Such have averaged 1.28% since the beginning of 2008 compared to a 3.18% average U.S. Treasury yield during the same span, and the JGB mean since the start of December is 0.99%.  Deflation remains.  The GDP price deflator fell 0.7% in the year to 4Q11, following drops of 1.5% in the year to 4Q10 and 2.9% in the year to 4Q09.  Nominal GDP last quarter plunged 3.1% at an annualized rate from 3Q and was 9.2% below its 2Q07 pre-recession high.  Real GDP slumped 2.3% annualized in 4Q and by 0.9% in calendar 2011.  Real GDP also posted decreases in 2008 of 1.0% and in 2009 of 5.5%.  In order to meet the Bank of Japan’s projected fiscal 2011 growth rate of negative 0.4%, GDP will need to advance about 2% at an annualized rate in this, the final quarter, of the financial year.

Other data also depict an economy that in the central bank’s own words is "more or less flat" and likely to remain so "for the time being."  Unemployment climbed to 4.6% in December from 4.1% in September, and wage earnings fell 0.2% in 2011.  Real household spending posted back-to-back monthly declines of 1.3% in November and 1.0% in December.  Industrial production fell 0.4% last quarter and was 2.7% below its 4Q10 level.  Private core machinery orders fell 2.6% last quarter after a 1.5% rise in 3Q11.  Consumer confidence rose to an 11-month high last month but remained weak historically with a sub-50 reading of 39.6.  The economy watchers index unexpectedly fell back to 44.1 in January from 47.0 in December.  The settlements trade balance deteriorated by JPY 9.6 trillion between calendar 2010 and 2011, almost halving the current account surplus to JPY 9.63 trillion.  Exports fell 1.9% last year but were 7.0% below a year earlier in December.  The deteriorating trend intensified last month when customs exports in the first twenty days recorded an on-year drop of 11.9% and contributed to a JPY 1.56 trillion trade deficit in that span.  December housing starts were 7.3% lower than a year before in December.

Despite better purchasing manager readings in January of 50.7 in manufacturing, 51.0 in services and 51.1 in the composite index, it seems like a better-than-even bet that the Bank of Japan will agree to yet another increase in the asset buying program.  Stimulus to date has not eradicated deflation.  The yen remains uncomfortably high, and intervention sales of the currency by the Ministry of Finance has been criticized by other governments.  Governor Shirakawa has admitted that an anticipated recovery has taken longer to materialize than had been assumed.  Core CPI inflation, which fell 1.1% in the year to December, has moved further from the 1-2% range that monetary policymakers generally consider consistent with price stability.  Some speculation has even surfaced that the Bank of Japan may move closer to an explicit inflation target, since previous steps to clarify how policy might respond to deviations of inflation from price stability have failed to stop deflation.  The Fed recently demonstrated there are all sorts of creative way to establish a virtual inflation target that skirt around any legislative approval.

The announcement times of BOJ policy decisions are not fixed.  Such depends on the length of the meeting.  Last month, the announcement was made at 12:31 local time (03:31 GMT and 22:31 EST in the United States).

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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