Bank of Japan Addresses Liquidity Squeeze With Several Policy Changes but Stops Short of Cutting Interest Rates Further

March 16, 2020

The Bank of Japan held an emergency Board meeting that lasted roughly two hours and then announced a number of actions clearly motivated by the approaching corporate fiscal yearend on March 31st.  Unlike central banks in the U.S., South Korea, New Zealand, Hong Kong and Macau, Japanese officials did not cut their targeted interest rates (-0.1% short-term and around 0.0% on the 10-year JGB) any further. A released statement also downgraded the BOJ’s economic assessment and revealed that only Harada and Katoaka among the nine board policymakers who have for some time wanted lower rates again voted for such. Markets reacted to this demonstrated reluctance to cut interest rates with disappointment.

Japanese monetary policy easing will be enhanced “through (1) the further ample supply of funds by conducting various operations including purchases of Japanese government bonds (JGBs) and the U.S. dollar funds-supplying operations, (2) measures to facilitate corporate financing including the introduction of a new operation, and (3) active purchases of exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs).” The target for annual JGB purchases remains about JPY 80 trillion.

The economic outlook has been modified to include two segments: the current situation that will extend forward for an unspecified time length dependent on both the spreading virus within Japan and the epidemiology of the global pandemic and a medium-term recovery that will follow the moderate recovery of economic activity with gradually accelerating inflation that has been featured in earlier baseline forecasts. It appears that Japan is probably in recession, which officials euphemistically characterize this way: “Japan’s economic activity is likely to remain weak for the time being, mainly affected by the outbreak of COVID-19. The year-on-year rate of change in the CPI is likely to be somewhat weak for the time being, partly due to the effects of the decline in crude oil prices.”

In his press conference, Governor Kuroda didn’t rule out a future cut in interest rate targets but said the focus on policymakers for the immediate period ahead had been the preservation of liquidity and orderly financial market conditions in the run-up to Japan’s fiscal yearend. He opined that the global downturn probably will not be as pronounced as it was in the Great Recession. By one measure then, America’s Dow Jones Industrial Average sank 42.8% from the collapse of Lehman Brothers on the weekend of September 13-14, 2008 to its bottom level in early March 2009. At today’s low, the DOW had dropped 31% since September 12. With no idea how disruptively long the pandemic will be, there’s not a whole lot of confidence to be found that share prices are only 10% away from there bottom.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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