BOJ Fails to Contain Investor Panic as Nuclear Risk Rises

Bank of Japan Governor Masaaki Shirakawa
Masaaki Shirakawa, governor of the Bank of Japan. Photographer: Toshiyuki Aizawa/Bloomberg

The Bank of Japan’s step to provide short-term liquidity and expand an asset-purchase program failed to contain investor panic today as the risk of nuclear radiation leaks north of Tokyo escalated.

BOJ Governor Masaaki Shirakawa’s pledge yesterday to secure financial stability and prevent investors from becoming more risk averse was overwhelmed today, with the Topix index of stocks suffering its worst two-day drop since the 1987 crash. In the interbank lending market, overnight call loan rates traded between 0.08 percent and 0.13 percent, according to Ueda Yagi Tanshi Co., higher than the BOJ’s target of zero to 0.1 percent.

“The market’s chaos won’t calm down unless the BOJ will take more bold actions,” said Susumu Kato, chief economist for Japan at Credit Agricole CIB and CLSA in Tokyo. “A further plunge in stocks will pressure the BOJ into additional easing.”

While the central bank said after its policy meeting yesterday that the economy remained on course to emerge from its fourth-quarter slump, risks to consumer confidence intensified with the government’s failure to contain a crisis at a nuclear power plant. Prime Minister Naoto Kan said in a televised address that the threat of further radiation leaks is rising.

Government Reaction

The Topix slid 9.5 percent at the close, following a 7.5 percent drop yesterday. Japan’s currency rose 0.2 percent to 81.46 per dollar. Bonds halted a two-day rally, sending 10-year yields 1.5 basis points higher to 1.215 percent.

Government officials sought to play down the rout.

Economic and Fiscal Policy Minister Kaoru Yosano told reporters markets will eventually stabilize, and there was no reason to suspend them. The slide in equities is due to uncertainty, and the economy is healthy, he said, adding that it was too early to comment on share-support measures. Chief Cabinet Secretary Yukio Edano said officials will closely monitor markets.

Shirakawa yesterday committed at a news conference in Tokyo to keep pumping cash as needed after unleashing a record 15 trillion yen ($183 billion) in one-day operations. The central bank added 8 trillion yen today. The bank yesterday also decided to double its asset-purchase program to 10 trillion yen, an increase that’s about one-tenth the size of the U.S. Federal Reserve’s Treasuries-buying effort.

‘Missing the Chance’

“The Bank of Japan is missing the chance of doing something more aggressive,” said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. in Tokyo, who used to work at the central bank, said yesterday. “What the BOJ should do now is to anchor investors’ sentiment” with accelerated purchases in its program, he said.

Should the equity market keep tumbling, Japan’s central bank may increase its purchases of risk assets under its asset-buying program, said Norio Miyagawa, senior economist at Mizuho Securities Research and Consulting Co. in Tokyo.

“If stocks continue to drop more and the yen gains further, it will probably have an adverse effect on corporate sentiment and household consumption,” Miyagawa said. “So the BOJ may need to take further action.”

Jim O’Neill, the London-based chairman of Goldman Sachs Asset Management, said the yen remains overvalued, giving the BOJ cause for more robust monetary stimulus.

“There is now clearly a case for being bold to ensure a speedy recovery from this tragedy,” O’Neill wrote in a note to clients yesterday. “Events certainly require it.”

Closed Plants

Manufacturers from Sony Corp. to Toyota Motor Corp. closed plants yesterday, with Sony, Japan’s biggest exporter of consumer electronics, halting operation at 10 factories and two research centers. Toyota, the world’s largest automaker, said it closed all 12 factories in Japan through March 16.

Tokyo Electric Power Co. battled to avert a meltdown in the nuclear power plant damaged from the temblor, the magnitude of which was revised up to 9 yesterday from 8.9, and its aftermath.

The Tokyo-based company today confirmed the third explosion at the No. 2 reactor of its Fukushima Dai-Ichi nuclear plant 220 kilometers (137 miles) north of Tokyo after cooling systems failed. The company said a fire had broken out at the building housing its No. 4 reactor, one of three that had been shut before the quake for maintenance.

Tokyo Electric has implemented rolling power cuts in the capital city and surrounding areas, a burden that, with the “ripple effect on other industries,” may cut gross domestic product by 0.3 percent, Nomura Holdings Inc. analysts estimated.

Spending Package

Government officials said they were continuing to assess the damage of the quake and it was too early to say how large a spending package would be. Noda has said policy makers couldn’t compile the bill as soon as by month-end. Lawmakers drafted a 2.7 trillion yen extra budget in May 1995 after the Kobe earthquake.

While Standard and Poor’s said the earthquake had no immediate effect on the nation’s AA- sovereign credit rating, Moody’s Investors Service said Japan may “at some point” reach a fiscal “tipping point” if investors lose confidence in the soundness of public finances and demand a risk premium on government bonds, adding that such a crisis isn’t “imminent.”

The ruling Democratic Party of Japan’s top official indicated yesterday that the government could use funds for lower-priority initiatives in the budget to pay for rescue and reconstruction efforts, a sign officials are trying to balance the need for extra money with the nation’s growing debt load.

Bond Sales ‘Questionable’

“It would be questionable to use bond sales to pay for the entire supplemental budget,” Katsuya Okada, secretary general of the DPJ, told reporters.

The BOJ will increase buying of government debt in the fund by 500 billion yen and boost purchases of short-term government securities by 1 trillion yen. Corporate debt will rise by 1.5 trillion yen and it will also take on an additional 450 billion yen in ETFs and 50 billion yen in Real Estate Investment Trusts.

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.

Kanno at JPMorgan shaved 0.5 percentage point from his GDP growth forecast for the first quarter, bringing it to 1.7 percent, and cut his second-quarter projection to 0.5 percent from 2.2 percent. He anticipates a rebound in the second half as reconstruction occurs, with a 4 percent expansion in July to September and 2.5 percent gain in the final three months of 2011.

“You wouldn’t expect a macro effect” from the BOJ’s steps so far, said Richard Jerram, chief economist at Macquarie Securities Ltd. in Singapore. “The liquidity supply was a normal response to make sure the markets function in an orderly fashion. It was nothing more than standard operating procedure.”


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