BOJ Policy Makers Reject Proposal to Expand Asset Purchases

Bank of Japan policy makers rejected a proposal by a deputy governor to expand its asset- buying program by 5 trillion yen ($61 billion) to cope with last month’s record earthquake.

The other eight members of the policy board voted against Deputy Governor Kiyohiko Nishimura’s proposal to increase a 40 trillion yen program to inject cash into the market, according to a statement released in Tokyo today. The policy makers decided unanimously to keep the benchmark overnight rate between zero percent and 0.1 percent.

Nishimura’s proposal underscores the pressure Japan’s central bank is facing to provide further monetary stimulus as the extent of damage from last month’s disaster becomes clear. Government data this week showed a record decline in industrial production in March and retail sales slumping most in 13 years.

“The BOJ will probably implement additional easing measures should the economy’s outlook deteriorates further,” Izuru Kato, chief market economist at Totan Research Co. in Tokyo, said before the announcement. “It will likely expand the asset-buying bund again, to 15 trillion yen.”

Standard and Poor’s yesterday lowered its outlook on Japan’s sovereign rating of AA- to “negative,” as the nation’s reconstruction costs will likely widen budget deficits.

The central bank has injected a record amount of cash in the money market and doubled its asset-purchase program since the March 11 earthquake that has killed or left missing almost 26,000 people. Prime Minister Naoto Kan last week unveiled a 4 trillion yen spending package for relief efforts and indicated that tax increases may be needed to fund stimulus.

Stalling Activity

Data released in the past month point to stalling activity in the world’s third-largest economy. Exports fell for the first time in more than a year and a report earlier today showed factory output slid a record 15.3 percent in March from February, the biggest drop since data began in 1953. Core consumer prices, the bank’s preferred measure, fell 0.1 percent.

The board will update its forecasts for economic growth and consumer prices at 3 p.m. in Tokyo today. The BOJ predicted gross domestic product would grow 1.6 percent in the year ending March 2012 and inflation would rise 0.3 percent when they reviewed the projections in January. Policy makers will probably cut their GDP estimate and raise their inflation outlook, according to economists surveyed by Bloomberg News.

Add Stimulus

Central bank Governor Masaaki Shirakawa this week indicated the central bank is ready to add stimulus if necessary, signaling the possibility of increasing a growth program targeted at encouraging lending to industries ranging from energy, the environment and agriculture.

Analysts said they don’t see Bank of Japan directly purchasing debt from the government to help fund public burden of reconstruction. Shirakawa this week reiterated that it’s “undesirable” to purchase debt directly because it could fan inflation. Buying government bonds may also discourage the government from raising taxes amid calls for Prime Minister Naoto Kan to resign over his handling of the earthquake and nuclear disaster.

“Having the BOJ underwrite debt would effectively end any debate on raising taxes,” said Ryutaro Kono, chief economist at BNP Paribas Securities Japan Ltd in Tokyo. “Embarking on debt monetization would spur inflation, drive up bond yields and invite a financial crisis.”

Risk of a rout in the bond market could be avoided by just increasing its 1.8 trillion yen of monthly government debt purchases from the market, according to Jun Ishii, chief fixed- income strategist at chief fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities Co.

To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net

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