Bank of Japan Errs With a Micro Response to Macro Challenge, Takenaka Says
The Bank of Japan’s offer of credit to cash-strapped businesses falls short of what’s needed to bolster growth after last month’s record earthquake, according to the former minister who led a clean-up of the nation’s banks.
The central bank yesterday offered a 1 trillion yen ($12 billion) one-year loan program to banks designed to get funds to companies hit by the record quake and tsunami March 11. Governor Masaaki Shirakawa left the main policy tools untouched, having boosted an asset-purchase program by 5 trillion yen last month.
Shirakawa has eschewed the “insurance policy” approach of the Federal Reserve in responding to risks, with policy stimulus added so far amounting to about one-tenth the U.S. quantitative- easing initiative. As the economy enters a likely contraction this quarter, with a report today showing one gauge of sentiment slumping by a record, lawmakers may prod the BOJ to do more.
“The bank will likely continue to do such a micro policy,” Heizo Takenaka, who served in former Prime Minister Junichiro Koizumi’s cabinet and was credited with forcing debt- laden banks to write off 19 trillion yen in bad loans. “However, the problem is macro monetary policy,” he said, urging the bank to step up purchases of government bonds in the secondary market.
BOJ officials have focused on maintaining financial stability in the wake of the magnitude-9 temblor and tsunami, injecting a record 15 trillion yen of one-day funds into the banking system on March 14. The bank “has been responding properly to additional fund demand,” Takenaka said.
Shirakawa to Watch
Shirakawa said at a press conference following the bank’s meeting yesterday in Tokyo that policy makers will watch how the steps taken so far will affect the economy. The bank downgraded its assessment of growth for the first time since October, seeing “strong downward pressure” after the catastrophe.
The Economy Watchers index, a survey of merchants, slid to 27.7 in March from 48.4 in February, the Cabinet Office said, the biggest drop since the survey began in 2000.
The Nikkei 225 (NKY) Stock Average was little changed after yesterday’s announcement; it rose 1.9 percent to 9,768.08 at the close today in Tokyo. Stocks fell earlier after a magnitude 7.1 earthquake struck northern Japan last night, knocking out some power at nuclear facilities.
The special credit program unveiled yesterday may help avert corporate bankruptcies in a region that’s suffered in excess of 27,000 people killed or missing and more than 200,000 buildings destroyed. Three prefectures -- Miyagi, Iwate and Fukushima, site of the crippled nuclear power plant -- accounted for most of the damage.
The gross domestic product of the three prefectures amounts to an equivalent of about $243 billion, or more than Ireland or Portugal. Portugal is seeking a European Union rescue package that may be worth as much as 75 billion euros ($107 billion), two European officials with knowledge of the situation said this week. Ireland’s bailout was 85 billion euros.
The disaster has affected production and consumer sentiment nationwide. Total retail sales in the world’s third-largest economy may drop as much as 10 percent this year, FamilyMart Co., the country’s No. 3 convenience-store chain, said yesterday. Companies from Toyota Motor Corp. to Sony Corp. have suspended factories.
“With the economy in this dire of a situation, the BOJ’s continued passivity means it further loses credibility,” said Hiroshi Miyazaki, chief economist at Shinkin Asset Management Co. in Tokyo. “Right now, the government’s been pretty quiet but soon enough, spurred by public opinion, politicians will start to step up pressure on the BOJ. The BOJ will then have no choice but to play its next card.”
Rate Becomes Useless
The BOJ has kept the benchmark overnight rate at 0.5 percent or less since 1996, and asset purchases and loan programs have become the BOJ’s main policy tools. The bank yesterday left the rate at a range of zero to 0.1 percent.
Damage from the quake and tsunami is estimated by the government to swell to as much as 25 trillion yen. Because the hit to the economy is mostly from production, so-called demand- side stimulus such as quantitative easing may be less effective, according to Azusa Kato, an economist at BNP Paribas SA in Tokyo.
“Disruptions to supply chains and power shortage are forcing companies to cut production, fueling concerns over a recession,” said Kato. “The most important measure Japan needs to take right now isn’t further monetary easing. It’s all about measures to counter power shortage.”
Takenaka, 60, now a professor at Keio University in Tokyo and chairman of temporary-staff provider Pasona Group Inc., said the central bank “unfortunately has been pursuing mistaken policy repeatedly” for years, failing to end deflation.
Consumer prices haven’t risen at a sustained 1 percent annual pace -- the definition of price stability laid out by BOJ board members -- since the early 1990s. Prices, excluding fresh food, dropped 0.3 percent in February from a year before.
Deflation may be poised to end as the yen weakens and commodity prices climb. The currency has retreated 7.4 percent in the past three weeks amid signs U.S. growth is picking up, auguring a widening interest-rate gap between the U.S. and Japan. Crude oil has climbed 27 percent in the past year.
A shortage of daily necessities along with rising raw material costs and a weakening yen may prompt companies to pass on costs to consumers, fueling inflationary concerns in the future, Takenaka said.
BOJ policy makers could help anchor price expectations at the same time as they inject more stimulus by setting an inflation target, said Takenaka, who was economy and banking minister from 2002 to 2004, then led a project of selling the postal service, aimed at boosting financial competition, from 2004 to 2006. He suggested a range of 1 percent to 3 percent
Shirakawa yesterday reiterated his opposition to the BOJ underwriting government debt with direct purchases, warning that it would undermine the yen. Some ruling-party and opposition Liberal Democratic Party lawmakers have urged the step, which is allowed in emergency circumstances with approval by the Diet.
Takenaka echoed current cabinet members in Prime Minister Naoto Kan’s government in opposing direct BOJ financing of deficit spending. He also rejected the proposal of some legislators of a temporary tax increase, saying it was “a ridiculous argument” at a time of economic weakness.
Kan plans to unveil what he says may be the first of multiple supplementary budgets this month. He has yet to detail how the spending will be paid for. Chief Cabinet Secretary Yukio Edano told reporters yesterday the first budget may be 4 trillion yen.
“It’s too early to discuss” the possibility of instructing the BOJ to buy government debt directly, Sadakazu Tanigaki, who served in Koizumi’s cabinet and now heads the LDP, told reporters yesterday. “That needs to be discussed in the process of figuring out how much fiscal spending will be necessary.”
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