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Yen’s Impact on Companies Likely to Spur BOJ Easing

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Masaaki Shirakawa, governor of the Bank of Japan
Masaaki Shirakawa, governor of the Bank of Japan. Photographer: Tomohiro Ohsumi/Bloomberg

Sept. 30 (Bloomberg) -- Evidence in the Bank of Japan’s Tankan survey that companies are growing more pessimistic will probably prompt the bank to expand support as soon as next week for businesses grappling with the yen’s advance.

The BOJ is expected to increase on Oct. 5 its 30-trillion yen ($359 billion) credit program for lenders to encourage bank lending and reduce demand for yen, 14 of 17 economists surveyed by Bloomberg News said. One economist forecasts the bank to cut the overnight loan rate to zero from 0.1 percent and buy more government bonds.

The credit facility has so far failed to arrest declines in bank loans and consumer prices and enlarging it won’t increase demand either, analysts say. Nintendo Co., the world’s biggest maker of video-game machines, yesterday cut its profit forecast by 55 percent after the yen’s 10 percent increase this year, and the Tankan showed that large manufacturers expect pessimists will outnumber optimists by year-end.

“The chance that the BOJ may increase its credit facility next week is high after the Tankan,” said Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo. “But that will only have a limited impact on the economy and the financial markets.”

Yen Sales

The central bank may proceed with further loosening partly because it’s under pressure from the government after the Finance Ministry sold yen on Sept. 15, abandoning its policy since 2004 of staying out of the currency market. On the same day, BOJ Governor Masaaki Shirakawa said the bank will pursue “strong monetary easing.”

“For now, the BOJ will try to get through by boosting the credit program,” said Teizo Taya, a former BOJ board member and now adviser of the Daiwa Research Institute in Tokyo. If the yen remains strong until the Oct. 28 board meeting, the central bank may be forced the bank to cut the benchmark rate to 0.05 percent from 0.1 percent, he said.

The yen’s advance and government demands, accompanied by diminishing policy stimulus and slowing exports, will likely prompt the BOJ to loosen credit further, Chiwoong Lee, Japan senior economist at Goldman Sachs, said in a report.

Large manufacturers’ sentiment index improved the least since early 2009 in September, to a reading of 8, the Tankan showed. Those companies expect the index to drop to minus 1 in December, meaning most of them are pessimistic about the outlook.

Declining Output

The currency’s advance has weighed on an export-dependent economy, which grew at less than half the pace in the April-June period compared with the previous quarter. Reports today showed industrial production unexpectedly declined for a third month and gains in retail sales were smaller than economists forecast.

Large manufactures expect the dollar to average 89.66 yen in the year to March 31, according to Tankan. The Japanese currency was traded at 83.51 yen per dollar at 2:16 p.m.

Murata Manufacturing Co., an electronics components maker, said it will cut most temporary jobs and move production abroad because of the stronger yen. Nintendo slashed its annual net profit forecast to 90 billion yen from 200 billion yen due to the currency.

Political Calls

Politicians have already indicated the BOJ could do more, with Economy Minister Banri Kaieda saying on Sept. 27 that additional liquidity injections by the Bank of Japan may be effective in influencing the yen. Vice Finance Minister Mitsuru Sakurai also said on the same day that increasing government bond purchases is one policy option for the central bank.

The easing step that Japan’s central bank is most likely to take, boosting a credit facility introduced in December, may not weaken the yen or revive corporate activity. The currency has climbed 1.2 percent since the program was bolstered by 10 trillion yen at an Aug. 30 emergency meeting.

Decreased Lending

Bank lending has dropped nine straight months, partly because companies don’t have an appetite for funds, while consumer prices have been declining for about a year a half, highlighting the deflationary pressure on Japan.

“It’s meaningless to just beef up the credit facility without other drastic policy steps,” said Seiji Shiraishi, chief economist at HSBC Securities in Tokyo, who predicts a rate cut and more bond buying next week.

On top of the central bank’s cash injections, strong investor demand for bonds due to risk aversion is also pulling down market interest rates, decreasing the incentive for lenders to borrow funds from the BOJ at the 0.1 percent rate, analysts said. Yields on 6-month government treasuries have fallen to 0.11 percent and those on one-year treasuries have come down to 0.119 percent.

Japanese banks say they don’t see much need to use the central bank’s facility because companies aren’t seeking loans.

Insufficient Demand

“There are some signs of a capital spending rebound among large and small companies in the April through June period, but this is managed by cash on hand and hasn’t resulted in borrowing from banks,” Masayuki Oku, chairman of both the Japan Bankers Association and Sumitomo Mitsui Financial Group Inc., said at a press conference on Sept. 21. “It’s still not enough to generate demand for capital.

Large companies plan to boost capital spending by 2.4 percent in the year ending March 31, the Tankan report showed. Economists forecast a 3 percent increase.

Should an economic slump require the BOJ to take further action, the bank will probably consider buying more bonds by abolishing its rule for such purchases, said Ryutaro Kono, chief economist at BNP Paribas in Tokyo.

Shirakawa defended on Sept. 26 the BOJ’s rule of keeping bond purchases below the amount of bank notes in circulation, saying that bond yields could rise if the BOJ printed money to pay for government debt.

Fed Move

Pressure on the BOJ to loosen credit could also increase if the U.S. Federal Reserve bolsters quantitative easing measures, according to Eiji Dohke.

Should the BOJ only expand its credit facility this time, “the bank would be compelled to take one or two more monetary policy easing actions this year” given that the Fed will ease policy, said Dohke, chief Japanese government bond strategist at Citi Group Global Markets Japan Inc. in Tokyo. A credit program expansion would be “insufficient to stop politicians’ calls on the central bank,” he said.

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

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

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