Bank of Japan Expands Stimulus as European Debt Crisis Pushes Up Yen

The Bank of Japan expanded stimulus as Europe’s sovereign-debt crisis caused an appreciation in the yen that may endanger a recovery from the March earthquake, tsunami and nuclear crisis.

Governor Masaaki Shirakawa and his policy board expanded their credit and asset-purchase programs to a total of 55 trillion yen ($724 billion) from 50 trillion yen in an 8 to 1 vote, the central bank said in a statement in Tokyo today. It also kept the overnight lending rate between zero and 0.1 percent.

Central banks from Brazil to Russia have cut borrowing costs and India signaled this week it was done with rate increases as nations turn to shelter their economies from the global slowdown. Economists said today’s policy boost was too small to address the strengthening yen and the BOJ may be forced to take further action if overseas economies deteriorate.

“In a word, this was disappointing,” said Masaaki Kanno, a former senior official at the Bank of Japan and now chief economist at JPMorgan Chase & Co. in Tokyo. “They could have taken more active policies to give the market a positive surprise rather than moving little by little.”

Asian shares rose as European leaders agreed on a plan to expand a bailout fund to stem debt woes. The Nikkei 225 Stock Average rose 2 percent at the close. The yen initially weakened after the decision, before strengthening to 75.89 at 3:51 p.m. in Tokyo. It climbed to a postwar high of 75.72 yesterday.

Economic Rebound

The currency’s appreciation is coming just as the nation recovers from the March disaster in the northeast that left around 19,000 dead or missing. Economists forecast that a rebound in production and rebuilding demand has ended a three- quarter slump in gross domestic product and the BOJ today said growth would accelerate next fiscal year.

The central bank expanded its asset-purchase fund to 20 trillion yen from 15 trillion yen and kept its fixed-rate lending program unchanged at 35 trillion yen. All of the additional funds will be used to buy Japanese government bonds, the BOJ said. Board member Ryuzo Miyao opposed the decision, calling instead for a 10 trillion yen expansion to BOJ’s asset purchase program.

JPMorgan’s Kanno said the BOJ could have made the stimulus more effective by increasing purchases by 10 trillion yen or buying bonds with longer maturities.

The BOJ said today’s added stimulus was needed “to ensure a successful transition to a sustainable growth path with price stability.” It said in a statement that while an overseas slowdown and a rising yen will hurt the Japanese economy for the time being, it’s expected to recover.

European Deal

The decision came after European leaders persuaded bondholders to take 50 percent losses on Greek debt and boosted the firepower of the rescue fund to 1 trillion euros ($1.4 trillion).

“Regardless of the results of the summits, there isn’t a chance that all of the concern will be wiped away quickly,” said Ryutaro Kono, chief economist at BNP Paribas SA in Tokyo. “The European debt crisis is a big risk factor not only for Europe but for the whole world economy.”

Japanese Finance Minister Jun Azumi said on Oct. 25 that the government is prepared to take “decisive” steps on the currency if necessary. The yen’s strengthening has been driven by Europe’s debt crisis and is not reflective of Japan’s economic fundamentals, he told reporters in Tokyo.

August Moves

In response to the yen’s gains, the BOJ on Aug. 4 expanded to 15 trillion yen from 10 trillion yen a program to buy assets from government bonds to exchange-traded funds. It also increased a fund to encourage banks to lend to 35 trillion yen from 30 trillion yen.

Prime Minister Yoshihiko Noda’s cabinet last week approved a 12.1 trillion yen spending plan to rebuild after the March disaster and to help companies cope with the higher yen.

Underscoring the sluggishness of Japan’s domestic demand, retail sales dropped 1.2 percent in September from a year earlier, a decrease that was sharper than expected by economists, according to government data released today.

Exports Climb

At the same time, in a sign that exporters are withstanding damage from the strong yen and a deceleration in advanced economies, overseas shipments increased 2.4 percent in September from a year earlier, more than analyst projections.

Toyota Motor Corp., Asia’s biggest carmaker, reported an increase in global vehicle output for the first time in 12 months in August. The automaker loses 34 billion yen in operating profit for every 1 yen appreciation against the dollar.

The International Monetary Fund last month lowered its forecast for global economic growth this year to 4 percent from 4.3 percent. China’s expansion moderated to 9.1 percent in the third quarter from a year earlier, the slowest pace since 2009.

To contact the reporters on this story: Aki Ito in Tokyo at aito16@bloomberg.net; Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net

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

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