Bernanke Backlash May Boost Japan's Opposition to Debt Buys
The backlash against Federal Reserve Chairman Ben S. Bernanke’s plans to buy an additional $600 billion of U.S. Treasuries may stiffen the Bank of Japan’s resolve against more aggressive monetary easing steps.
Governor Masaaki Shirakawa signaled last week that large- scale stimulus like the Fed’s isn’t in the offing, saying that if needed the bank would expand an existing 5 trillion yen ($62 billion) asset-buying fund. Since then, China has said the Fed’s measure will fuel inflation and German Finance Minister Wolfgang Schaeuble called the U.S. plan “clueless.”
“This will support the Bank of Japan’s case for holding off from easing monetary policy,” said Takuji Aida, a senior Japan economist at UBS AG in Tokyo. “If the yen strengthens the BOJ will probably be forced to ease, but this will let it take its time.”
Any move by the BOJ to emulate the Fed’s quantitative easing might deepen global concern that emerging economies will be flooded by cash from advanced countries, leading to bubbles. Should the yen add to its 15 percent climb against the dollar so far this year, hurting exports and worsening deflation, any BOJ policy response is likely to remain smaller than the Fed’s move, according to Sumitomo Mitsui Asset & Management.
Countering Strong Yen
“It’s fully possible that the BOJ will expand monetary stimulus to counter the yen, as the basic trend of the currency’s advance hasn’t changed much,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui in Tokyo. “The bank will increase the asset-buying fund as its next policy action. Given that such an expansion will still be dwarfed by the scale of Fed’s easing, however, criticism that the BOJ isn’t doing enough will linger.”
The yen has climbed 1.9 percent against the dollar since the BOJ cut the overnight call rate to between zero and 0.1 percent on Oct. 5 and also unveiled the 5 trillion yen fund to buy government and corporate debt, real estate investment trusts and exchange-traded funds. It was trading at 81.69 to the dollar at 9:48 a.m. in Tokyo.
Deflation continues in Japan, with consumer prices excluding fresh food falling for the 19th straight month in September. BOJ board members are forecasting inflation below the 1 percent increase they consider as stable in the three years through March 2013.
BOJ’s Quantitative Easing
Lessons learned when they conducted quantitative easing themselves may be behind BOJ officials’ lack of enthusiasm about resuming the policy, Aida said.
Between 2001 and 2006 the central bank sought to ease monetary conditions by injecting cash into bank reserves, at its peak targeting 35 trillion yen in reserves.
The funds that the BOJ pumped in during that era inflated asset prices in other markets, as traders borrowed yen cheaply to buy overseas assets, in a process known as a yen-carry trade, Aida said. “That experience has also made the central bank cautious about aggressive easing,” he said.
Shirakawa said that monetary stimulus in large economies can have a “big” effect outside of their borders.
“I’m aware that monetary easing in advanced economies has a big impact on emerging economies as well as on financial markets, including commodity markets,” Shirakawa said at a news conference on Nov. 5 following a policy board meeting.
Risk of Bubbles
His remarks may suggest the BOJ will refrain from loosening credit too much, said economist Mari Iwashita.
“Governor Shirakawa probably mentioned the risks of excess liquidity bubbles as a warning aimed at the BOJ itself as well as other central banks, signaling that going on an easing spree should be avoided,” said Iwashita, chief market economist at Nikko Cordial Securities in Tokyo.
Chinese Vice Finance Minister Zhu Guangyao said this week that the Fed move might “shock” emerging markets by flooding them with capital.
“Around the world we have $10 trillion of hot money flowing around, more than the $9 trillion in hot money at the beginning of the global financial crisis,” Zhu said. The U.S. “has not fully taken into consideration the shock of excessive capital flows to the financial stability of emerging markets.”
Japan’s central bank, for its part, might need to consider further easing in January or February, said Nikko Cordial’s Iwashita. That’s when economic figures will likely show a slowdown in the fourth quarter stemming from weaker global demand, damage to exports and output from the strong yen and the waning of government stimulus measures, she said.
The BOJ may increase its asset buys to 20 trillion yen from 5 trillion yen by the end of next year if the economy slumps, the government issues more bonds and the U.S. eases further, wrote Tokyo-based Goldman Sachs Group Inc. economists Chiwoong Lee and Yuriko Tanaka in a report.
“However, we do not expect much impact on the real economy,” the two wrote. “BOJ Governor Shirakawa himself has acknowledged that copious fund supply and extensive easing have failed to boost funding demand, but the BOJ nevertheless feels it has to give heed to what it can do.”
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