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BOJ Refrains From Adding Stimulus Even After Economy Slips Into Recession

The Bank of Japan’s policy board unanimously voted to maintain monetary policy even after a report yesterday showed the country slipped into a recession following a record earthquake.

Governor Masaaki Shirakawa and his eight colleagues decided to maintain a 30-trillion yen ($370 billion) credit program and a 10-trillion yen asset-purchase fund that represent the bank’s main policy tools. Deputy Governor Kiyohiko Nishimura dropped his call made last month to expand asset buys to provide more stimulus. The key overnight rate was kept at zero to 0.1 percent.

Signs of a deteriorating economy put renewed pressure on the BOJ to provide additional stimulus after it stepped-up asset purchases and flooded money markets with cash in the wake of the March 11 temblor. Shirakawa said the economy will rebound later this year as production and supply constraints ease, while warning about the outlook for electricity supply in the long run.

“Given that policy options are pretty limited, the BOJ probably wants to preserve as much ammunition as possible,” said Mari Iwashita, chief market economist at SMBC Nikko Securities Inc. in Tokyo. “Chances for additional easing are still alive and we could see the BOJ expand asset purchases by 5 trillion yen, as the deputy governor proposed, around August.”

Benchmark 10-year yields fell to a six-month low on May 16 amid expectations that the central bank will expand stimulus in coming months. All 14 economists surveyed by Bloomberg News expected policy to be unchanged today. The yen was little changed at 81.74 per dollar at 4:37 pm. In Tokyo.

Electricity Supply

Supply constraints will ease from autumn and the threat of a power shortage in the summer isn’t as high as was expected, Shirakawa told a news conference after the meeting. Still, he “can’t be optimistic” about long-term power supply as the closure of the Hamaoka nuclear power plant, west of Tokyo and away from the quake-hit areas, increases uncertainty over the fate of other nuclear facilities in Japan, he said.

“The Bank of Japan will need to monitor the impact of this on the economic outlook,” he said, adding that the power supply issue is a risk factor that the central bank will watch.

Gross domestic product contracted an annualized 3.7 percent in the three months through March, led by a slump in consumer and corporate outlays as well as a decrease in inventories. GDP in nominal terms shrank at a 5.2 percent pace, a reminder how entrenched deflation is in the world’s third-largest economy.

Economic Contraction

“There’s no doubt that the economy will shrink in the current fiscal year” which ends March 31, Toshiro Muto, a former BOJ deputy governor and now head of Daiwa Institute of Research, said yesterday in Tokyo.

The economy will contract between 0.4 percent and 0.5 percent in fiscal 2011 even though the country is expected expand again in the fourth quarter, he said. BNP Paribas Securities, Barclays Capital and Japan Institute of Research are also predicting the economy will shrink in the fiscal year.

BOJ policy makers last month cut this fiscal year’s GDP forecast to 0.6 percent in the wake of the March 11 disaster, from the 1.6 percent growth projected in January.

“For the time being, attention should be paid to the downside risks to economic activity, especially the possible effects of the disaster,” the BOJ said.

‘Flexible’ Action

There are signs that the central bank may be preparing to add more stimulus should economic conditions worsen. The BOJ last week said it’s seeking government approval to allow the bank to increase legal reserves to maintain financial soundness. More capital would help the bank implement “appropriate and flexible action,” Masayoshi Amamiya, a BOJ executive director, said in parliament on May 12.

“The decision signals its readiness to buy more assets,” said Izuru Kato, chief market economist at Totan Research Co. in Tokyo. The bank would move “should long-term interest rates surge, risk premiums expand or the yen rises rapidly,” he said.

Prime Minister Naoto Kan yesterday told legislators that the government hopes for “flexible action” by the central bank to support the economy.

“It’s highly probable that the BOJ would implement additional monetary easing by August,” when Kan’s administration aims to compile a next round of stimulus to finance reconstruction projects, said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo.

Output Recovery

Recent data show a mixed picture for the outlook. Factory output fell by a record and exports contracted in March while consumer confidence slumped at an unprecedented pace in April. At the same time, machinery orders unexpectedly rose in March, pointing to a rebound in capital spending.

Companies are already undertaking rebuilding efforts. Toyota Motor Corp. last week said its domestic and overseas productions will begin recovering in June, at least a month earlier than previously announced. Renesas Electronics Corp. (6723), the world’s biggest maker of microcontrollers used in cars, said its production will resume at a quake-affected plant in Ibraki prefecture in June 1, about two weeks earlier than initially scheduled.

“Damages of supply-chains are apparently being fixed at a faster pace, and this will help production rebound steadily,” said Kiichi Murashima, chief economist at Citigroup Global Markets Japan Inc. in Tokyo.

BOJ policy makers have suggested their next action will be additional easing, even as policy makers in Asia tighten and the European Central Bank unwinds stimulus.

“BOJ policy makers will have no other choice but to pursue a monetary easing bias for the time being,” Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset and Management Co. in Tokyo, said before the report. “The bank will probably expand asset purchases, as the deputy governor has proposed, sometime between June and August.”

Of the 14 economists surveyed by Bloomberg News this week, eleven said the central bank will probably hold off a rate increase until 2013, while one said the bank will increase the rate next year. Two said borrowing costs won’t rise until 2014.

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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