Japan’s Monetary Base Slides for First Time Since 2008: Economy

Japan’s liquidity supply dropped in March for the first time in more than three years, fueling politicians’ complaints that the central bank should be doing more to end deflation.

The monetary base fell 0.2 percent from a year earlier after climbing 11.3 percent in the previous month, a Bank of Japan (8301) report showed today. The average amount outstanding was 112.46 trillion yen ($1.37 trillion).

Opposition to the nomination of BNP Paribas SA economist Ryutaro Kono to the central bank’s board has highlighted some lawmakers’ concern that the BOJ isn’t doing enough to spur growth in the world’s third-biggest economy. Governor Masaaki Shirakawa and his officials have pledged “powerful easing” until 1 percent inflation is in sight.

“This raises the question of how serious the BOJ is about monetary easing,” said Yasuhide Yajima, chief economist at NLI Research Institute Ltd. in Tokyo. “This may give a reason for politicians to put more pressure on the BOJ.”

The yen traded at 81.93 per dollar as of 3:13 p.m. after earlier touching 81.56, the highest since March 9.

The monetary base is the currency supplied by the BOJ and its total current-account balance as well as banknotes and coins in circulation. It surged 16.9 percent in March 2011 and peaked the following month after the BOJ poured a record amount of cash into the financial system to stabilize the economy after a record earthquake and tsunami.

Photographer: Kiyoshi Ota/Bloomberg

A pedestrian walks past the Bank of Japan headquarters in Tokyo. Close

A pedestrian walks past the Bank of Japan headquarters in Tokyo.

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Photographer: Kiyoshi Ota/Bloomberg

A pedestrian walks past the Bank of Japan headquarters in Tokyo.

Monetary Tightening

“A shrinking monetary base is equivalent to monetary tightening,” Yuji Shimanaka, chief economist at Mitsubishi UFJ Morgan Stanley Securities Co. in Tokyo, said before the report was released. “They may fail to win trust for accommodative monetary policy operations and that could bring back a situation where we have deflation with strong yen in the worst case scenario.”

Annualized, the monetary base fell 6.7 percent last month compared with three months ago after it dropped 16.4 percent in February, indicating that it’s shrinking even if last year’s money injections are taken into account, Shimanaka said, citing his own calculations.

Elsewhere, Australia’s central bank kept its benchmark interest rate at 4.25 percent today, and signaled it may resume cutting borrowing costs as soon as next month if weaker-than- expected growth slows inflation. A Chinese index for non- manufacturing industries rose in March, according to a report from the statistics bureau and the logistics federation. Thai inflation accelerated for the first time in five months in March on rising oil prices, while the Philippines reported its first budget surplus in six months.

U.S. Orders

Orders to U.S. factories increased 1.5 percent in February after a 1 percent decline in January, according to the median estimate of economists surveyed by Bloomberg News before the report today. In the euro region, producer prices probably rose 0.5 percent in February from a month earlier, analysts’ forecasts showed.

In Japan, Deputy Governor Hirohide Yamaguchi said yesterday the central bank isn’t targeting monetary base levels when a lawmaker asked why the amount shrank by more than 6 trillion yen from January to February. Even with the recent declines, the supply of currency remains near the levels that existed when the BOJ conducted quantitative easing from March 2001 to March 2006.

“This is very important,” Yoichi Kaneko, a lawmaker in the ruling Democratic Party of Japan, told Yamaguchi in a parliamentary hearing. This means that while promising a strong easing stance, “the BOJ has sapped money from the market,” he said.

Lawmaker Scrutiny

BOJ policy makers have come under lawmaker scrutiny in recent weeks. Japan’s largest opposition party has said it’s likely to oppose Kono, ranked the nation’s top economist by Nikkei Veritas, the weekly edition of Japan’s largest business newspaper. Kono cautioned about risks associated with “aggressive monetary policy” in a Bloomberg News survey last month.

Kiyohiko Nishimura, the bank’s other deputy, was asked by lawmakers about the idea of adopting a Federal Reserve-style “operation twist,” swapping short-term bonds for longer-dated securities.

Sentiment among Japan’s largest manufacturers failed to improve in March as executives predicted the yen will rebound against the dollar, hurting exporters’ sales and profits, the BOJ’s quarterly Tankan index showed yesterday.

“Business conditions aren’t good enough to convince companies to be optimistic,” Yajima said. “There’s room for the BOJ to do more to ensure a recovery.”

To contact the reporters on this story: Masahiro Hidaka in Tokyo at mhidaka@bloomberg.net; Toru Fujioka in Tokyo at tfujioka1@bloomberg.net

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

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