BOJ Keeps Key Overnight Rate at Zero to 0.1%
The Bank of Japan (8301) kept monetary policy unchanged after adding 10 trillion yen ($130 billion) of stimulus last month to combat a yen near a postwar high.
Governor Masaaki Shirakawa and his policy board kept the key benchmark interest rate between zero and 0.1 percent and left its credit and asset-purchasing programs totaling 50 trillion yen unchanged, in line with forecasts by 10 of 13 economists surveyed by Bloomberg News. The vote was unanimous, the bank said in a statement.
The yen advanced against the dollar as the bank refrained from adding stimulus a day after Switzerland pledged to put a ceiling on its exchange rate against the euro. The Swiss and Japanese have had to contend with appreciation in their currencies as risks to global growth boost their appeal with investors seeking safe-haven assets.
“Further monetary easing is still on the table,” said Junko Nishioka, chief economist at RBS Securities in Tokyo and a former BOJ official. “If the yen strengthens sharply beyond the postwar high, that could push stocks lower, increasing the chance that the BOJ will ease more.”
Japan’s currency traded at 77.26 against the dollar at 1:41 p.m. in Tokyo, compared with 77.39 before the announcement. The yen touched a postwar high of 75.95 on Aug. 19. Prime Minister Yoshihiko Noda’s administration is weighing stimulus measures to help companies cope with the yen’s gains.
“The BOJ just increased stimulus, so it’s natural they’d now want to gauge how effective that is,” Akio Makabe, an economics professor at Shinshu University in central Japan, said before the decision. “Noda may ask for a stronger commitment from the BOJ to ease policy. If the yen keeps strengthening, we can expect them to add more stimulus before year end.”
Two analysts surveyed predicted policy easing and one saw an equal chance Shirakawa would announce stimulus measures or keep credit programs unchanged. The lending facility and asset program have been the central bank’s main policy tools since it lowered the key rate to near zero in October.
The BOJ expanded stimulus on Aug. 4, hours after authorities intervened in currency markets to prevent the yen’s appreciation from derailing the nation’s recovery from a March earthquake.
Noda, a former finance chief sworn in last week to replace Naoto Kan, is drafting a third package to rebuild after the March quake. He has said the government is weighing measures to help companies deal with the rising yen. The currency has climbed 3 percent against the dollar in the past three months.
The premier has also indicated taxes may need to be raised to help fund the initiatives. Moody’s Investors Service lowered the nation’s credit rating on notch to Aa3 last month, citing weak prospects for growth that will make it difficult for the government to rein in the world’s largest public debt burden.
The yen has retreated from its highest level since 1945, and weakened yesterday after the Swiss central bank said it will keep the euro above 1.20 francs and will defend that line with “utmost determination.” Finance Minister Jun Azumi said earlier this week that the yen’s gains have been “abrupt.”
A rebound in the world’s third-largest economy from the March 11 temblor that left more than 19,000 dead or missing may be losing steam. Capital spending unexpectedly declined in the second quarter and a regular revision to consumer price data showed the economy is still struggling with deflation. Growth in the U.S., the nation’s second-largest export destination after China, is also slowing, a sign Japan may not be able to count on exports to end three quarters of economic contraction.
$100 Billion Program
Japanese policy makers have been focused on alleviating the pressure of the strong yen by establishing lending programs to encourage companies to acquire businesses or energy resources overseas. The Finance Ministry last month said it would make $100 billion of its foreign-currency reserves available for companies through a state-run lender.
“The central bank will want to show it’s willing to cooperate with the new administration when it can,” said Mari Iwashita, chief market economist at SMBC Nikko Securities Inc. in Tokyo. “But there isn’t much the central bank can do. It would probably be prudent for them to ease policy in October, around the time the third extra budget is due to pass.”
In addition to boosting its fixed-rate lending program and asset-purchase facility, analysts surveyed said the BOJ may also weigh expanding the maturities of debt it purchases to lower borrowing costs as well as cutting the amount of interest it pays on reserves financial institutions park at the BOJ.
The central bank is unlikely to pursue more unorthodox measures to stop the yen’s strengthening such as buying foreign assets, a move that would interfere with the Finance Ministry’s control over currency policy, according to Izuru Kato, chief economist in Tokyo at Totan Research Co.
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