The Bank of Japan’s first back-to-back monthly stimulus expansion since 2003, and the unveiling of an unlimited program to support bank loans, proved insufficient to reverse the yen’s strength and stoke the stock market.
The skepticism that met the BOJ’s announcement yesterday underscores Governor Masaaki Shirakawa’s struggle to lift the world’s third-largest economy out of two decades of deflation. While he touted the bank as a front-runner in innovation, the central bank’s challenge is that corporate demand for credit is limited, said Junko Nishioka, chief economist at RBS Securities Japan Ltd. and a former BOJ official.
Japan’s benchmark Nikkei 225 Stock Average slid 1 percent after the BOJ boosted its asset-purchase program by 11 trillion yen ($138 billion) and announced the facility to underwrite banks’ loans. The yen closed in Tokyo about 5 percent from a postwar high against the dollar and 26 percent stronger than what Nissan Motor Co. Chairman Carlos Ghosn said was a “neutral” value.
“Japanese companies are cutting capital spending as exports are weakening and domestic demand is shrinking -- in this environment, it’s hard to think lending will increase,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management in Tokyo. “They wanted to show that they were doing something” with yesterday’s decision, he said.
The Nikkei was 1.1 percent higher at 10:22 a.m. in Tokyo after U.S house prices rose the most in two years, paring the decline from this year’s March high to around 13 percent. The yen was little changed against the dollar at 79.61.
Economy Minister Seiji Maehara attended his second BOJ meeting yesterday, highlighting political pressure for action from the central bank. The joint statement he issued with Shirakawa and Finance Minister Koriki Jojima after the meeting was the first of its type, Maehara said. It said that the government “strongly expects” powerful easing until deflation is overcome.
The central bank moved hours after September data showed the biggest decline in industrial output since last year’s earthquake. Nomura Securities Co. yesterday estimated that the economy contracted an annualized 5.1 percent in the third quarter from the second as the global economy cooled and subsidies for car purchases wound down. Strength in the yen is crimping exports.
Tensions in the BOJ board emerged yesterday as Shirakawa said new members Takehiro Sato and Takahide Kiuchi objected to the wording of a policy statement.
Kiuchi, formerly an economist at Nomura Securities, and Sato, formerly an economist at Morgan Stanley MUFG Securities Co., opposed saying the bank will pursue powerful monetary easing until it judges a 1 percent inflation goal to be in sight, Shirakawa said at a press conference. “They were of the opinion that the wording of the commitment should be changed,” he said.
Some analysts were skeptical yesterday of the likely impact of the loan support program, which echoes efforts by the Bank of England to revive credit growth.
The measure confronts a relative lack of appetite for borrowing among Japanese companies, with a gauge of loan demand published by the BOJ this month at about one-third the level of 2006, the year before the global credit crunch began. Bank lending remains below its recent peak in 2009, at 397.7 trillion yen outstanding in September.
The program is unlikely to stimulate borrowing and banks already have ample deposits to use for loans, said Shinichiro Nakamura, a senior banking analyst at SMBC Nikko Securities Inc. in Tokyo. The facility may squeeze their interest margins, reducing profitability, he said.
Japanese banks are already earning the least profit on loans in more than a decade. Average net interest margin, a measure of profit on loans, at 84 Japanese lenders on the Topix Banks Index has dropped to 1.4 percent, from 1.6 percent three years earlier, according to data compiled by Bloomberg based on the latest filings. That’s the lowest since at least 2001 and trails 3.25 percent for 24 U.S. banks on the KBW Bank Index.
The near-collapse of the financial system in 2008, the world recession of 2009 and the global economic slowdown this year have driven central banks to craft new tools to revive growth. Policy makers have set up asset-purchase programs, embraced negative interest rates and, in Switzerland, adopted an exchange-rate cap.
Japan’s lending facility parallels efforts by the Bank of England to stoke lending and growth. The BOE’s Funding for Lending Scheme began in August, and the bank said yesterday that 30 lenders had signed up so far, with the potential to borrow an initial 66.3 billion pounds ($107 billion) under the plan.
Britain’s example has shown some promise. U.K. mortgage approvals rose to a four-month high in September, the Bank of England said Oct. 29. BOE Governor Mervyn King said this month that measures including the FLS had helped lower banks’ funding costs by about 100 basis points since June.
The BOJ’s facility builds on a venture-capital style fund it set up in 2010 that expanded to 5.5 trillion yen and was aimed at industries from environmental technology to tourism and disaster prevention.
Shirakawa yesterday said that his central bank has been a front-runner for monetary policy, and that he was disappointed at any comparison with other central banks. Lawmakers have criticized the BOJ this year for coming up short compared with the Federal Reserve in taking measures to aid the economy.