Bank of Japan Expands Stimulus as Economy Set to Slow

Japan Production Rises Less Than Forecast as BOJ Meets
The world’s third-largest economy rebounded last quarter after shrinking in 2011 with the impact from a record earthquake, and is forecast to moderate as a bump from reconstruction diminishes. Photographer: Kiyoshi Ota/Bloomberg

The Bank of Japan expanded its plan for government-bond purchases by 10 trillion yen ($124 billion) after the world’s third-largest economy showed signs of slowing and lawmakers pressed for more aggressive steps.

The BOJ will boost its asset-purchase fund to 40 trillion yen by June 2013, compared with the previous target of 30 trillion yen by year-end, it said in a statement today in Tokyo. A separate central bank program providing funds to banks was pared by 5 trillion yen amid lackluster demand for loans.

Governor Masaaki Shirakawa was under pressure to act after a group of lawmakers proposed overhauling the BOJ’s governing law to ensure steps to end the deflation afflicting the nation for more than a decade. The BOJ today said today its 1 percent inflation goal will be achieved before too long, a prediction of victory that undermines the impact of today’s stimulus, according to Credit Suisse Group AG’s chief Japan economist.

“The effect of these positive actions could be completely erased,” said Tokyo-based Hiromichi Shirakawa, who worked at the central bank before joining Credit Suisse. “It’s like the BOJ said it’s going to press on the accelerator and they suddenly hit the brake hard.”

The analysis of Shirakawa, no relation of the BOJ chief, was reflected in the reaction of Japan’s currency. The yen initially slid after the asset-purchase increase exceeded the forecasts of some analysts, then recouped the losses. It was little changed at 80.59 per dollar at 5:15 p.m. in Tokyo, after dropping as much as 0.6 percent earlier in the day.

“We are conducting policy at an appropriate pace,” Governor Shirakawa told reporters in Tokyo today. Easing “of course isn’t something we’d continue to do every month,” he said.

Tough Decision

Manufacturers see the current yen rate making it difficult to maintain production in Japan, National Strategy Minister Motohisa Furukawa said in an interview this week. Industrial production rose less than forecast in March, a government report showed today, underscoring forecasts for the economy to slow in coming quarters as post-earthquake reconstruction spending fades.

Policy makers left their benchmark interest rate at between zero and 0.1 percent today. The asset-purchase fund has been the main policy tool since the rate was brought to zero in the wake of the worsening of the global financial crisis in 2008.

The central bank also extended the maximum maturity of government bonds purchases in the program to three years, from two years. Yields on benchmark 10-year Japanese government bonds dipped 1.5 basis points to 0.895 percent after the announcement.

Lawmakers Split

Lawmakers offered differing takes on today’s decision. Finance Minister Jun Azumi told reporters that the amount of easing was appropriate, and that he hopes the BOJ will act decisively to achieve 1 percent inflation. Yoichi Kaneko, secretary of the ruling party’s Anti-Deflation League, said “this is a move in the right direction but is insufficiently strong.”

BOJ board members today predicted that consumer prices will advance 0.7 percent in the year to March 2014, up from a previous estimate of 0.5 percent, while still short of the goal.

Consumer prices excluding fresh food rose 0.2 percent from the year before, exceeding estimates, a government report showed earlier today. The BOJ said today it would likely “be not too long” before the target was met.

July Stimulus

The BOJ may add more stimulus in July, when it will review forecasts released today, said analysts including Mari Iwashita, chief market economist at SMBC Nikko Securities Inc. in Tokyo.

Earlier today, a report showed South Korea’s current-account surplus widened in March to a four-month high as overseas shipments of cars, electronics and oil products rose. The excess was $3 billion, compared with $557 million in February. China said profits of its industrial companies advanced in March after a drop in the previous two months.

In the U.K., consumer confidence was unchanged this month and is unlikely to improve after data this week showed the economy slid into its first double-dip recession since 1975, GfK NOP Ltd. said.

In Europe, inflation in Spain, which had its credit rating cut yesterday, probably held at the slowest pace since August 2010. Consumer prices, based on European Union calculations, rose 1.8 percent in April, according to the median estimate of economists surveyed by Bloomberg News.

In the U.S., gross domestic product rose at a 2.5 percent annual rate in the first quarter after advancing 3 percent in the previous three months, according to the median forecast of 85 economists surveyed by Bloomberg before a Commerce Department release today.

Rebound to Wane

Japan, the world’s third-largest economy, rebounded last quarter after shrinking in 2011 with the impact from a record earthquake, and is forecast to moderate as a bump from reconstruction diminishes. Industrial output in Japan gained 1 percent from February, compared with the 2.3 percent median forecast in a Bloomberg News survey of economists, a Trade Ministry report showed in Tokyo today.

Japan’s exporters have contended with a surge in the yen alongside tepid demand abroad as developed nations struggle to gain momentum from the 2008-2009 global recession and China’s expansion moderates. Nintendo Co., the world’s largest maker of video-game machines, yesterday forecast profit that fell short of analysts’ estimates. The company is recovering from its first annual loss since it listed in 1962.


Nissan Motor Co. Chief Executive Officer Carlos Ghosn said this week that the currency is the unpredictable “one-thousand-pound gorilla” that makes all Japanese car manufacturers suffer.

Rising pressure on the BOJ comes as Prime Minister Yoshihiko Noda is struggling to convince lawmakers to double a 5 percent sale tax to contain the world’s largest public debt burden. Political pressure will remain high as politicians want to show public that the nation is making progress toward the end of deflation so a tax bump won’t be too much of burden, Masayuki Kichikawa, chief economist at Bank of America Merrill Lynch, said before today’s decision.

Today’s output report also showed that manufacturers forecast a month-on-month rise in production of 1 percent in April and a 4.1 percent fall in May. Takuji Okubo, chief Japan economist at Societe Generale SA in Tokyo, said the May outlook was “devastating.”

‘Given Up’

“It seems as if manufacturers have given up trying to go back to pre-quake production levels,” Okubo said. “Because of the yen and weak demand overseas, they don’t think exports are going to expand.”

Last month’s advance in consumer prices was propelled by higher energy costs, with household goods damping the gain, today’s statistics bureau report showed. Shutdowns of Japan’s nuclear reactors since the quake and tsunami have deepened the nation’s reliance on imported fuel, boosting energy costs.

Retail sales also missed analysts’ forecasts today, with purchases down 1.2 percent in March from the previous month, compared with the median estimate for a 0.5 percent drop. A separate report showed that the unemployment rate held at 4.5 percent last month.

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