BOJ Keeps Credit Program Unchanged, Says It's Ready to Do More If Needed
Bank of Japan Governor Masaaki Shirakawa said the central bank is ready to take more action and is watching the effect of the strong yen on the nation’s economy.
“We won’t rule out any policy options,” Shirakawa said at a press conference in Tokyo today after the bank kept borrowing costs and the size of its liquidity injections unchanged. “We will take policy action in a timely and appropriate manner if determined necessary.”
Shirakawa’s remarks suggest the BOJ could implement further monetary stimulus if the yen, which is approaching a 15-year high against the dollar, threatens to derail the nation’s export-led expansion. A leadership election in Japan’s ruling party may affect pressure on the BOJ to do more to defeat deflation and shore up the recovery.
“The BOJ is signaling that its policy stance has become pretty flexible and it’s becoming more inclined to implement monetary measures,” said Mari Iwashita, chief market economist at Nikko Cordial Securities in Tokyo.
The yen rose today against the dollar and euro on concern sovereign-debt risks will hinder the fiscal heath of European banks, clouding the outlook for the global recovery. The yield on Japan’s benchmark 10-year bonds fell from an 11-week high and the Nikkei 225 Stock Average slid 0.8 percent.
“We are thoroughly aware of the fact that the stronger yen is affecting exporters, particularly small businesses,” Shirakawa said. At the same time, companies are taking measures to combat the gains and reap the benefit of the currency’s appreciation, including being able to make overseas acquisitions more cheaply, he said.
Shirakawa and his board left the bank-loan facility at 30 trillion yen ($356 billion) after boosting it at an Aug. 30 emergency meeting. Policy makers held the benchmark overnight rate at 0.1 percent, where it’s been since December 2008, the bank said in Tokyo today.
Today’s decision was unanimous, after last week’s 10- trillion-yen expansion of the credit program was opposed by board member Miyako Suda. Asked about the yen’s gains since the emergency decision, Shirakawa said policies shouldn’t be evaluated by immediate currency movements.
“It’s not appropriate to gauge whether policies have been successful or not based on short-term movements in markets,” Shirakawa said.
Japan’s central bank reiterated that it will pay attention to downside risks amid uncertainty over the U.S. economic outlook and “instability” in foreign exchange and stock markets. Australia’s central bank kept its overnight cash target rate at 4.5 percent today, extending a pause on rate increases amid concern global growth may falter.
Shirakawa said developments in the U.S. economy have been weaker than the bank had forecast earlier this year.
The board maintained its assessment of the economy, saying that the expansion will remain in a “recovery trend.” It said consumer spending has been supported by unseasonably hot weather and increased demand for durable goods ahead of the expiry of a government incentive program.
The government will probably raise its estimate of gross domestic product this week to an annualized 1.5 percent from a 0.4 percent growth after a report showed capital spending dropped at the slowest pace since 2007, according to the median estimate of 20 economists surveyed by Bloomberg News.
Ichiro Ozawa, who will run in a DPJ presidential election on Sep. 14 against Prime Minister Naoto Kan, said last week that “there is little room left for the BOJ to maneuver monetary policy.” Kan has called on the BOJ to “cooperate” with the government in the fight to banish deflation.
Government pressure on the central bank could re-emerge if economic conditions worsen. The BOJ last week expanded the credit program for lenders following politicians’ calls on it to help stem the yen’s rise.
The government’s ability to shelter the economy from the stronger yen is limited because of a debt burden that’s nearing double the size of gross domestic product. Officials in the past have pushed the BOJ to play a bigger role in jump-starting the economy considering the fiscal restraints.
A stronger exchange rate makes exports less competitive and reduces the yen value of exports. Sony Corp. Chief Executive Officer Howard Stringer last week said that the currency’s appreciation is a “huge handicap for us.” The company generated more than 70 percent of its sales from overseas markets last fiscal year, according to Bloomberg data.
Parliament plans to hold special committee sessions this week and may ask Shirakawa about the bank’s view on the yen and deflation, Tsutomu Okubo, the DPJ lawmaker who is a director of the upper house committee, said in an interview yesterday. The sessions will commence on Sept. 8 and Sept. 9.
The BOJ predicted in July the economy will grow 2.6 percent in the year to March 2011 and 1.9 percent in the following 12 months. Those forecasts will probably be lowered next month and may prompt further policy action, according to economist Noriaki Matsuoka.
“If we were to see a change, it’s likely to happen when the bank releases the outlook report at the end of October,” said Matsuoka, an economist at Daiwa Asset Management Co. in Tokyo. “The focus will be on how much the bank cuts its projections in the October outlook report.”
Possible policy steps including a further expansion of the 30 trillion yen credit program, cutting interest rates to zero and buying more government bonds from lenders, said Ryutaro Kono, chief economist at BNP Paribas in Tokyo.
“An expansion of the BOJ’s government bond purchases is still low on the bank’s policy option list now,” Nikko’s Iwashita said. Should the winner of the DPJ race choose to bolster spending “then the chance for more BOJ bond buys will become realistic even though the bank is concerned such action may be regarded as debt monetization.”