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BOJ to Provide 10 Trillion Yen in Emergency Credit


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By Mayumi Otsuma

Dec. 1 (Bloomberg) — The Bank of Japan said it’s ready to pump more money into the financial system after unveiling a 10 trillion yen ($115 billion) program to help an economy battered by falling prices and the yen’s surge to a 14-year high.

“If there is a shortage of liquidity we are prepared to provide more funds,” Governor Masaaki Shirakawa said after an emergency board meeting in Tokyo today that decided to offer three-month loans at 0.1 percent to commercial banks.

Bond yields fell the most in 13 months, lowering borrowing costs for companies whose profits are being threatened by deflation and the yen’s advance. Today’s action constitutes “quantitative easing in the broad sense” said Shirakawa, who earlier today faced demands from government ministers to complement a stimulus package that Prime Minister Yukio Hatoyama will release this week.

“The BOJ was facing a lot of pressure from the markets and the government, so it wanted to show that it was being proactive,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo. “The BOJ’s understanding is that deflation risks have increased.”

The yen pared losses after earlier falling the most in more than a month on speculation the bank would take action that would limit the currency’s appreciation. It traded at 86.83 per dollar at 11:39 a.m. in London from 87.53 before the announcement. Last week the yen reached 84.83, the highest since 1995, threatening earnings at exporters including Toyota Motor Corp.

Bond Yields

The yield on Japan’s five-year bond dropped 7.5 basis points, the most since October 2008, to a four-year low of 0.455 percent. The Nikkei 225 Stock Average closed 2.4 percent higher before the decision was published.

The policy board kept the key overnight lending rate at 0.1 percent, a level that Shirakawa said is already effectively zero, indicating he is unlikely to lower the rate.

The bank also maintained its monthly purchases of Japanese government bonds at 1.8 trillion yen. Analysts expect the central bank to expand the bond transactions eventually.

“Today’s move is only the first tentative step by the Bank of Japan to a much more substantive quantitative easing policy,” said Glenn Maguire, chief Asia-Pacific economist at Societe Generale SA in Hong Kong. “Ultimately, JGB purchases will form the bulk of that policy — and to have any meaningful effect, those purchases will have to be in excess of 2.2 to 2.5 trillion yen per month.”

Asian Tightening

Japan’s central bank is expanding credit just when others in Asia-Pacific are looking to tighten. The Reserve Bank of Australia today raised interest rates for an unprecedented third straight month to 3.75 percent on mounting evidence that the economy is strengthening.

The world’s second-largest economy expanded at an annual 4.8 percent pace in the third quarter, the second straight expansion after the country’s worst postwar recession. Shirakawa and his colleagues maintained their view that the economy is “picking up,” adding that it will keep growing at a “moderate” pace until the middle of fiscal 2010.

“Although there is no change to our assessment of the economy, the yen has been rising and stocks have been declining, which may have adverse effects on corporate sentiment,” Shirakawa said, when explaining the basis for today’s decision.

The move came a month after the bank decided to phase out earlier emergency lending measures, including unlimited collateral-backed loans to banks. Shirakawa said introducing today’s program doesn’t conflict with the expiry of those measures, which were aimed at improving funding for companies.

Collateral Range

Unlike the unlimited lending facility, which required private-sector debt as collateral, the bank will accept a wider range of assets including government bonds as well as debt issued by local governments. The program has no time limit.

The measure will “further spread the strong effect of monetary easing and encourage a further decline in longer-term interest rates in the money market,” the central bank said.

Prime Minister Hatoyama welcomed the decision.

“I’m very happy that the BOJ and government share the same view” on the economy, said Hatoyama, who is scheduled to meet with Shirakawa tomorrow. “I applaud their efforts to show their resolve to stop deflation and spur the economy.”

Chief Cabinet Secretary Hirofumi Hirano said the government didn’t pressure the central bank to make the move. “It was taken in step with the government’s economic policies and was an appropriate and timely action taken in response to a change in underlying economic conditions,” he said.

Extra Budget

The government said today the extra budget will fight price declines and the stronger yen. Finance Minister Hirohisa Fujii indicated yesterday that the spending would exceed 2.7 trillion yen, or the amount of money frozen from the previous administration’s budget.

Fujii and Deputy Prime Minister Naoto Kan today said quantitative-easing policies of adding cash to the financial system can support the economy.

The BOJ introduced a form of quantitative easing in March 2001 when it began pumping cash into the reserves that it makes available for banks. It ended that policy in March 2006.

Consumer prices slid 2.2 percent in October, an eighth monthly drop, and the central bank forecasts the declines will extend into fiscal 2011.

The yen’s 11 percent gain against the dollar in the past six months has exacerbated the price slump by driving import costs lower. Today’s program may not be enough to stem those gains, said Bank of Tokyo-Mitsubishi UFJ Ltd.

“The decision to offer only three-month loans has proved underwhelming,” Lee Hardman, a currency economist in London at Bank of Tokyo, wrote today. “It is unlikely to either have a material impact on economic recovery or alter the downward momentum in dollar-yen.”

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This entry was posted on Tuesday, December 1st, 2009, 8:45 am and is filed under Financial Market, World News. You can follow any responses to this entry through RSS 2.0. You can leave a response, or trackback from your own site.

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