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BOJ Boosts Loan Program, Pledges More Steps If Needed

Masaaki Shirakawa, governor of the Bank of Japan, speaks during a news conference after an emergency board meeting at the central bank's headquarters in Tokyo. Photographer: Tomohiro Ohsumi/Bloomberg
Masaaki Shirakawa, governor of the Bank of Japan, speaks during a news conference after an emergency board meeting at the central bank's headquarters in Tokyo. Photographer: Tomohiro Ohsumi/Bloomberg

Aug. 30 (Bloomberg) -- The Bank of Japan added 10 trillion yen ($118 billion) in liquidity injections after a surge in the nation’s currency to a 15-year high threatened economic growth.

The BOJ boosted the facility to a total of 30 trillion, the bank said in a statement after an emergency meeting in Tokyo. Governor Masaaki Shirakawa said in a press briefing that the bank is ready to take more action if necessary, and cited risks to its view that the economy will remain on a recovery track.

Stocks pared gains as the size of the step disappointed some analysts, and the yen recouped losses that were sparked by news of the meeting. With domestic demand for credit limited, government measures may be more effective, though a battle for leadership of the nation’s ruling party means more stimulus may not come until after the Sept. 14 contest.

“Monetary policy alone can’t change the current situation in Japan,” said Kyohei Morita, chief economist at Barclays Capital in Tokyo. “The government should play a central role to relay the liquidity to the real economy” by having more fiscal spending, he said.

Shirakawa led the gathering after cutting short a U.S. trip in the wake of increasing calls from politicians for the BOJ to help stem a surge in the yen. Today’s decision reflects rising concern about growth in advanced economies, and follows a signal from Federal Reserve Chairman Ben S. Bernanke that the U.S. is open to further measures if needed to avert another recession.

Political Reaction

Japanese politicians praised the central bank’s move today, with Vice Finance Minister Motohisa Ikeda saying he welcomed the bank’s “swift response.”

“The government plans to work with the central bank to deal with the severe conditions we are facing now,” Chief Cabinet Secretary Yoshito Sengoku said at a press conference. “We want the bank to continue implementing policy appropriately and flexibly while maintaining close contact with the government.”

The bank-loan program that the BOJ is expanding was set up in early December in response to a November climb in the yen to the highest level since 1995. That mark was breached this month, when it hit 83.60 per dollar.

Japan’s currency was at 84.89 as of 6:29 p.m. in Tokyo, after dropping to as low as 85.91. The Nikkei 225 Stock Average rose 1.8 percent after climbing as much as 3.2 percent.

Stock Reaction

“Stocks will certainly give up some of the gains,” said Winston Barnes, the head of sales and trading for Asian markets at WJB Capital Group Inc. in San Francisco. The BOJ “did what was expected,” rather than provide investors with a surprise degree of monetary expansion, he said.

The extra 10 trillion yen unveiled today will be offered in six-month credit, with the term for the other 20 trillion yen remaining at three months. Board member Miyako Suda dissented with her eight colleagues in today’s vote, the bank said.

“Uncertainty about the future, especially for the U.S. economy, has heightened more than before, and foreign exchange and stock markets have recently been unstable,” the central bank said. “In these circumstances, the bank judged it is necessary to pay more attention to the downside risks to the outlook for Japan’s economic activity and prices.”

BOJ policy makers doubled the size of the bank-loan fund to 20 trillion yen in March. That decision also followed political pressure, with then Finance Minister Naoto Kan urging the central bank to adopt an inflation target to help end declines in consumer prices.

Risk to Forecast

“We’re ready to take appropriate action if we determine it is necessary,” Shirakawa said at a press conference after the decision. “We can’t rule out the possibility that risk factors could force us to revise our main scenario for the economic outlook.”

Yasuhiro Matsumoto, a senior credit analyst at Shinsei Securities Co. in Tokyo, said large Japanese companies “have little demand for cash, so the step has little to do with their finance.”

Kan, who is now prime minister and battling to keep the post following a challenge to the leadership of the ruling party, last week said “we are ready when necessary to take bold measures” in the currency market. Speaking to reporters Aug. 27 after meeting with business executives, he said he expected the Bank of Japan to take action “swiftly.”

In addition to the central bank’s move, Kan’s aides are compiling a stimulus package to buttress growth as consumer prices keep falling and prospects for export growth are hampered by slowing expansions in overseas economies. Kan will meet with Shirakawa today and then decide on the outline of his government’s economic stimulus plan, Sengoku said earlier today.

Party Competition

The pressure on Shirakawa comes as Kan faces intra-party competition from his most powerful rival. Ichiro Ozawa, whose campaign-funding scandals forced him to step down in June as the DPJ’s No. 2 official, will run against Kan in the Sept. 14 election for party president. The party’s majority in the lower house of parliament ensures its leader becomes prime minister.

The central bank kept its benchmark overnight lending rate at 0.1 percent today, and refrained from changing its monthly total of 1.8 trillion yen of government-bond purchases. Also absent from today’s statement was any specific reference to intervention in the currency market to stem gains in the yen.

Shirakawa told reporters the bank won’t rule out any policy actions. He said the size of the bank’s government bond purchase program is appropriate and the central bank needs to consider the adverse effects of lowering the key interest rate.

Currency Intervention

Japan hasn’t mounted foreign-exchange intervention since March 2004, when the yen was around 109 per dollar. The Bank of Japan, acting on behest of the Ministry of Finance, sold 14.8 trillion yen in the first three months of 2004, after record sales of 20.4 trillion yen in 2003. Finance Minister Yoshihiko Noda said on Aug. 28 that Japan will take “bold” action if necessary to curb the yen’s surge.

Bernanke told participants at the conference that “the preconditions for a pickup in growth in 2011 appear to remain in place” and he rebuffed skeptics who argue the Fed is out of ammunition. Bank of England Deputy Governor Charles Bean said in a paper at the gathering that “further policy action may yet be necessary.”

The Commerce Department last week cut its estimate for U.S. gross domestic product in the second quarter to an annual pace of 1.6 percent from an initially reported 2.4 percent. Intel Corp., the world’s biggest chipmaker, yesterday cut its forecasts for third-quarter revenue and gross profit margin, adding to signs that capital spending is cooling.

Erode Profits

In Japan, a strengthening yen threatens to erode profits of exporters from Toyota Motor Corp. to Sony Corp. Trade has accounted for the majority of the recovery from Japan’s worst postwar recession, with domestic consumption hampered by unemployment and sustained deflation.

Japanese consumer prices fell for a 17th month in July and household spending rose less than forecast, reports showed last week. Prices excluding fresh food declined 1.1 percent from a year earlier. Household spending rose 1.1 percent, lower than the median estimate of economists in a Bloomberg News survey for a 1.5 percent gain.

At the same time, the unemployment rate fell for the first time in six months, to 5.2 percent.

Japan’s GDP growth slowed to 0.4 percent at an annualized pace in the second quarter from a 4.4 percent rate in the previous three months. The figures, released earlier this month, also showed that China’s economy surpassed Japan’s as the world’s second biggest, behind the U.S., for the quarter.

The BOJ said today that its action “will encourage a decline in market interest rates and further enhance easy monetary conditions.”

To contact the reporter on this story: Mayumi Otsuma in Tokyo at

To contact the editor responsible for this story: Chris Anstey in Tokyo at

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