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BOJ Pours Record $183 Billion Into Japan’s Financial System

Bank of Japan Governor Masaaki Shirakawa
Bank of Japan Governor Masaaki Shirakawa. Photographer: Tomohiro Ohsumi/Bloomberg

The Bank of Japan poured a record 15 trillion yen ($183 billion) into the world’s third-biggest economy today as the strongest earthquake in the nation’s history triggered a plunge in stocks and surge in credit risk.

The yen fell after the central bank added funds to the financial system, reversing earlier gains against the dollar on speculation authorities would sell the currency to aid exporters. Governor Masaaki Shirakawa yesterday said he is ready to unleash “massive” liquidity to support markets.

“This is a big and also appropriate move,” said Stephen Schwartz, chief economist for Asia at Banco Bilbao Vizcaya Argentaria SA in Hong Kong. “It’s a short-term measure to ensure stability to prevent this shock from spilling over to the financial markets.”

Japan faces power blackouts, the risk of meltdowns at a nuclear power station, and a predicted death toll of more than 10,000 after the 8.9-magnitude temblor and subsequent tsunami devastated northeastern regions. More than 350,000 people are in emergency shelters. The central bank, meeting from noon in Tokyo, may respond to the disaster with tools other than policy rates, already cut to near zero to counter deflation.

Besides the 15 trillion yen of emergency funds deployed in the central bank’s biggest one-day operation, the Bank of Japan offered to buy 3 trillion yen of government bonds from lenders in repurchase agreements starting March 16.

Today’s policy meeting was brought forward from 1 p.m.

Death Toll

“We are providing as much funds as needed to dispel anxiety in financial markets,” said Kazushige Kamiyama, an official in charge of the central bank’s money market operations. “We will continue to add ample funds to stabilize financial markets.”

The disaster may have killed 10,000 in Miyagi prefecture north of Tokyo, said Go Sugawara, a spokesman for the prefectural police department. The official toll reached 1,597, with 1,481 more missing and 1,683 injured, the National Police Agency said.

Before the quake, Japan’s economy was showing signs of a revival, after shrinking an annualized 1.3 percent in the fourth quarter of last year.

The cost of protecting Japanese government bonds with credit-default swaps surged the most in two years and the Nikkei 225 Stock Average fell 6.2 percent as of 1 p.m. local time.

Asset Purchases

The yen touched 80.62, the strongest since Nov. 9, before falling to 82.12 per dollar, from 81.84 in New York last week. It has gained about 1 percent against the greenback since the March 11 earthquake.

Bank of Japan officials may keep the central bank’s asset-purchase plans unchanged as they gauge the effect of the disaster. Economists said officials will likely keep longer-term credit programs at a total of 35 trillion yen.

The economic hit from the March 11 quake will depend on how long it shuts down factories and the distribution of goods and services, with the potential meltdown at the nuclear power facility clouding the outlook. For now, the central bank is likely to ensure lenders have enough cash to settle transactions, and aim any additional steps at providing credit in the areas of northeastern Japan devastated by the temblor, analysts said.

Spending Package

Shirakawa and his board could opt to accelerate asset purchases, including government bonds and exchange-traded funds, within the existing credit programs, particularly if the yen climbs and stocks tumble, said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. in Tokyo, who used to work at the central bank.

Prime Minister Naoto Kan is also preparing a fiscal response. Economic and Fiscal Policy Minister Kaoru Yosano said at a press conference the government still has 1.3 trillion yen in discretionary funds from the budget for the year through March 31 that can be allocated for quake relief.

“This earthquake affected a wide area, and it’s likely that the economic impact will exceed the 20 trillion yen in damage sustained during the Kobe earthquake” of 1995, Yosano said.

Finance Minister Yoshihiko Noda said it would take beyond the end of this month to compile a supplementary budget package. Opposition leader Sadakazu Tanigaki told reporters in Tokyo yesterday he proposed to Kan a temporary tax to help fund the relief effort.

The central bank set up a task force after the temblor, and pledged in a statement March 11 to ensure financial stability and said it will do everything it can to provide ample liquidity. The BOJ extended 55 billion yen to lenders over the past two days to ensure cash was on hand for withdrawals by survivors.

Assessing Banks

The money went to 13 financial institutions operating outside regular business hours in disaster-struck areas, the bank said in a statement yesterday, adding that it was checking on the scale of damage to lenders.

The quake struck hardest in Tohoku, the northern region of the main island of Honshu that accounts for about 8 percent of Japan’s gross domestic product.

Sony Corp. and Toyota Motor Corp. halted production after the quake struck 2:46 p.m. local time 130 kilometers (81 miles) off the coast of Sendai, north of Tokyo. Nissan Motor Co. said 2,300 new vehicles were damaged by tsunami surges. Tokyo Electric Power Co. is battling to avoid a meltdown at its Fukushima nuclear plant, and warned it will today begin rolling, periodic blackouts of Tokyo.

Declines in stocks may shake consumer confidence, which slid to a 10-month low in December as the government started to unwind economic stimulus measures. The economy had contracted in the fourth quarter as consumer spending and exports slumped, a decline economists had said would be temporary as a rebound in global growth fuels overseas demand.

Cost of Recovery

“The earthquake has increased the risk the economy won’t be able to emerge from its lull, which many believed would happen this quarter” said Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo. He added that the government is likely to spend about 5 trillion yen for recovery efforts.

Policy makers may establish a lending program to help financial institutions in the Tohoku area, said Hiromichi Shirakawa, chief Japan economist at Credit Suisse in Tokyo and a former Bank of Japan official.

Today’s decision was originally scheduled for tomorrow following a two-day meeting; the BOJ said it cut short the gathering to accelerate its response. Shirakawa plans a press conference after the announcement.

‘New Measures’

“The BOJ is very likely to focus on cautious operations aimed at preventing any problems in fund transactions between financial institutions,” Goldman Sachs Group Inc. economists including Tokyo-based Chiwoong Lee wrote in a research note. “We also expect it to devise new measures in the context of its current comprehensive monetary policy to support the rebuilding of affected areas and buoy the entire Japanese economy based on continuing assessments of the impact.”

In the days following the Kobe earthquake, the BOJ boosted liquidity injections to the money market and pumped 500 billion yen in excess funds to restrain the uncollateralized overnight lending rate, which was around 2 percent. It also lowered its benchmark official discount rate to a record low as the economy deteriorated and the yen rose. The currency surged about 21 percent in the three months after the quake.

Noda said March 11 that Japan’s growing debt load would not impede its rescue effort. Standard and Poor’s downgraded Japan’s credit rating to AA- in January and Moody’s Investors Service lowered its outlook on the nation’s Aa2 grade to negative from stable last month.

“We are going to do everything we can” Noda told reporters in Tokyo after the quake. “The fiscal situation can’t be a constraint to addressing this natural disaster.”

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