The Bank of Japan’s move to inject record cash into money markets while limiting bond purchases, signaled the central bank is limiting its role to securing financial stability in the aftermath of the March 11 earthquake.
BOJ Governor Masaaki Shirakawa pledged at a news conference in Tokyo to keep pumping cash as needed after unleashing 15 trillion yen ($183 billion) in one-day operations yesterday. The bank also yesterday decided to double its asset-purchase program to 10 trillion yen, an increase that’s about one-tenth the size of the U.S. Federal Reserve’s Treasurys-buying effort.
“The Bank of Japan is missing the chance of doing something more aggressive,” said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. in Tokyo, who used to work at the central bank. “What the BOJ should do now is to anchor investors’ sentiment” with accelerated purchases in its program, he said.
Focus now shifts to the size of the fiscal package Prime Minister Naoto Kan will compile, its design and how it will be paid for given that Shirakawa said yesterday the BOJ cannot underwrite government bonds. Morgan Stanley analysts estimated the economic damage at hundreds of billions of dollars.
The liquidity injection helped reverse a climb in the yen, which was little changed late yesterday in Tokyo at 81.90 per dollar. The currency rose 1.4 percent on March 11 after the quake spurred speculation Japan’s investors would repatriate overseas assets, a phenomenon that sent it climbing 21 percent in the three months after the January 1995 Kobe earthquake.
Jim O’Neill, the London-based chairman of Goldman Sachs Asset Management, said the yen remains overvalued, giving the BOJ cause for more robust monetary stimulus.
“There is now clearly a case for being bold to ensure a speedy recovery from this tragedy,” O’Neill wrote in a note to clients yesterday. “Events certainly require it.”
Stocks tumbled yesterday, with the Nikkei 225 Stock Average losing 6.2 percent by the close, to 9,620.49. Benchmark 10-year government bond yields slid 7 basis points to 1.2 percent as investors sought a haven.
Manufacturers from Sony Corp. to Toyota Motor Corp. closed plants yesterday, with Sony, Japan’s biggest exporter of consumer electronics, halting operation at 10 factories and two research centers. Toyota, the world’s largest automaker, said it closed all 12 factories in Japan through March 16.
Tokyo Electric Power Co. battled to avert a meltdown in the nuclear power plant damaged from the 8.9-magnitude temblor and its aftermath. The company implemented rolling power cuts in Tokyo and surrounding areas, a burden that, with the “ripple effect on other industries,” may cut gross domestic product by 0.3 percent, Nomura Holdings Inc. analysts estimated.
Government officials said they were continuing to assess the damage of the quake and it was too early to say how large a spending package would be. Finance Minister Yoshihiko Noda reiterated that the government couldn’t compile the bill this month. Lawmakers drafted a 2.7 trillion yen extra budget in May 1995 after the Kobe earthquake.
While Standard and Poor’s said the earthquake had no immediate effect on the nation’s AA- sovereign credit rating, Moody’s Investors Service said Japan may “at some point” reach a fiscal “tipping point” if investors lose confidence in the soundness of public finances and demand a risk premium on government bonds, adding that such a crisis isn’t “imminent.”
The ruling Democratic Party of Japan’s top official indicated yesterday that the government could use funds for lower-priority initiatives in the budget to pay for rescue and reconstruction efforts, a sign officials are trying to balance the need for extra money with the nation’s growing debt load.
“It would be questionable to use bond sales to pay for the entire supplemental budget,” Katsuya Okada, secretary general of the DPJ, told reporters.
Shirakawa told reporters yesterday that cash injections will continue as needed and it is “crucial” the central bank stabilizes money markets, an indication it will take further steps in coming days.
“We need money at the banks — they shouldn’t be lacking cash,” said Kazuaki Oh’e, a debt salesman at CIBC World Markets Japan Inc. in Tokyo. Trading is taking place as usual, he said.
The BOJ will increase buying of government debt in the fund by 500 billion yen and boost purchases of short-term government securities by 1 trillion yen. Corporate debt will rise by 1.5 trillion yen and it will also take on an additional 450 billion yen in ETFs and 50 billion yen in Real Estate Investment Trusts.
“Had the BOJ not acted today, they would have been blamed for exacerbating the disruptions — so this was basically a defensive move,” Robert Feldman, head of economic research at Morgan Stanley MUFG Securities Co. in Tokyo, said in an e-mailed response to questions. “The move did help stabilize market conditions, and so the BOJ does deserve credit for doing the right thing. I hope that they do more of it.”
Before the quake, Japan’s economy was showing signs of a revival, after shrinking an annualized 1.3 percent in the fourth quarter of last year. The BOJ yesterday maintained its assessment that the economy is emerging from its deceleration.
Kanno at JPMorgan shaved 0.5 percentage point from his GDP growth forecast for the first quarter, bringing it to 1.7 percent, and cut his second-quarter projection to 0.5 percent from 2.2 percent. He anticipates rebound in the second half as reconstruction occurs, with a 4 percent expansion in July to September and 2.5 percent gain in the final three months of 2011.
“You wouldn’t expect a macro effect” from the BOJ’s steps so far, said Richard Jerram, chief economist at Macquarie Securities Ltd. in Singapore. “The liquidity supply was a normal response to make sure the markets function in an orderly fashion. It was nothing more than standard operating procedure.”
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