Bank of Japan Pours $146 Billion Into System to Calm Markets

Friday, 11 Mar 2011 12:43 AM

 

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Japan's central bank poured a record 12 trillion yen ($146 billion) into the financial system Monday to help steer the world’s third-biggest economy through the recovery from the nation’s strongest earthquake.

Bank of Japan Governor Masaaki Shirakawa told reporters late Sunday that he was ready to unleash “massive” liquidity.

Bank of Japan policy makers meeting later Monday in Tokyo may keep the central bank’s asset-purchase plans unchanged as they gauge the effect of the disaster. Economists said officials will likely keep longer-term credit programs at a total of 35 trillion yen. The bank’s main interest rate has already been cut to near zero as policy makers last year sought to end the nation’s deflation.

“This is a big and also appropriate move,” said Stephen Schwartz, chief economist for Asia at Banco Bilbao Vizcaya Argentaria SA in Hong Kong. “It’s a short-term measure to ensure stability to prevent this shock from spilling over to the financial markets.”

The Nikkei 225 Stock Average fell sharply in morning trading.

Besides the 12 trillion yen of emergency funds, the Bank of Japan offered to buy 3 trillion yen of government bonds from lenders in repurchase agreements starting March 16.

Economic Damage

The economic hit from Friday's quake will depend on how long it shuts down factories and the distribution of goods and services, with the potential meltdown at a nuclear power facility clouding the outlook. For now, the central bank is likely to ensure lenders have enough cash to settle transactions, and aim any additional steps at providing credit in the areas of northeastern Japan devastated by the temblor, analysts said.

Shirakawa and his board could opt to accelerate asset purchases, including government bonds and exchange-traded funds, within the existing credit programs, particularly if the yen climbs and stocks tumble, said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. in Tokyo, who formerly worked at the central bank.

Japan’s currency rose 0.5 percent to 81.45 per dollar as of 8:11 a.m. in Tokyo, bringing its climb since the earthquake hit to almost 2 percent, amid prospects for Japanese investors to repatriate assets. The government may order the BOJ to sell yen if it soars, Mansoor Mohi-uddin, head of global currency strategy at UBS AG in Singapore, wrote in a note.

Spending Package

Prime Minister Naoto Kan is also preparing a fiscal response. Fiscal Policy Minister Kaoru Yosano said at a press conference the government still has 1.3 trillion yen in discretionary funds from the budget for the year through March 31 that can be allocated for quake relief.

“This earthquake affected a wide area, and it’s likely that the economic impact will exceed the 20 trillion yen in damage sustained during the Kobe earthquake” of 1995, Yosano said.

Finance Minister Yoshihiko Noda said it would take beyond the end of this month to compile the supplementary budget package.

Opposition leader Sadakazu Tanigaki told reporters in Tokyo Sunday he proposed to Kan a temporary tax to help fund the relief effort.

The central bank set up a task force after the temblor, and pledged in a statement Friday to ensure financial stability and said it will do everything it can to provide ample liquidity. The BOJ extended 55 billion yen to lenders over the past two days to ensure cash was on hand for withdrawals by survivors.

Assessing Banks

The money went to 13 financial institutions operating outside regular business hours in disaster-struck areas, the bank said in a statement Sunday, adding that it was checking on the scale of damage to lenders.

The quake struck hardest in Tohoku, the northern region of the main island of Honshu that accounts for about 8 percent of Japan’s gross domestic product.

Companies from Sony Corp. to Toyota Motor Corp. halted production after the quake struck 2:46 p.m. local time 130 kilometers (81 miles) off the coast of Sendai, north of Tokyo. Nissan Motor Co. said 2,300 new vehicles were damaged by tsunami surges. Tokyo Electric Power Co. Sunday was battling to avoid a meltdown at its Fukushima nuclear plant, and warned it will begin rolling, periodic blackouts of Tokyo.

Declines in stocks may shake consumer confidence, which slid to a 10-month low in December as the government started to unwind economic stimulus measures. The economy had contracted in the fourth quarter as consumer spending and exports slumped, a decline economists had said would be temporary as a rebound in global growth fuels overseas demand.

Cost of Recovery

“The earthquake has increased the risk the economy won’t be able to emerge from its lull, which many believed would happen this quarter” said Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo. He added that the government is likely to spend about 5 trillion yen for recovery efforts.

Policy makers may establish a lending program to help financial institutions in the Tohoku area, said Hiromichi Shirakawa, chief Japan economist at Credit Suisse in Tokyo and a former Bank of Japan official.

Monday’s decision was originally scheduled for Tuesday following a two-day meeting; the BOJ said it cut short the gathering to accelerate its response. Shirakawa plans a press conference after the announcement.

‘New Measures’

“The BOJ is very likely to focus on cautious operations aimed at preventing any problems in fund transactions between financial institutions,” Goldman Sachs Group Inc. economists including Tokyo-based Chiwoong Lee wrote in a research note. “We also expect it to devise new measures in the context of its current comprehensive monetary policy to support the rebuilding of affected areas and buoy the entire Japanese economy based on continuing assessments of the impact.”

In the days following the Kobe earthquake, the BOJ boosted liquidity injections to the money market and pumped 500 billion yen in excess funds to restrain the uncollateralized overnight lending rate, which was around 2 percent. It lowered its benchmark official discount rate in April and September, bringing it to 0.5 percent, a record low at the time, as the economy deteriorated and the yen rose. The currency surged about 21 percent in the three months after the quake.

In the Kobe case, demand for cash in the money market surged because commercial lenders had to meet withdrawals from businesses and individuals who wanted cash on hand.

Kobe Response

Lawmakers drafted a 2.7 trillion yen supplementary budget in May 1995 to help with reconstruction efforts in Kobe, where the disaster killed more than 6,000 people. Friday's earthquake and the tsunami it produced might have killed more than 10,000, national broadcaster NHK reported, citing Miyagi prefecture police. The official toll reached 977, with 739 more missing and 1,683 injured as of late Sunday.

“A large part of the reconstruction costs will probably have to be met by local authorities and ultimately by central government, which is already struggling to bring public debt under control,” said Julian Jessop, chief international economist at Capital Economics Ltd. in London. “The greater the social and economic damage, the larger the threat to the government’s ability and willingness to ward off a fiscal crisis.”

Noda said the nation’s growing debt load would not impede its rescue effort. Standard and Poor’s downgraded Japan’s credit rating to AA- in January and Moody’s Investors Service lowered its outlook on the nation’s Aa2 grade to negative from stable last month.

No ‘Constraint’

“We are going to do everything we can” Noda told reporters in Tokyo on Friday after the quake. “The fiscal situation can’t be a constraint to addressing this natural disaster.”

Stepping up policy easing efforts may help accelerate the end of deflation in Japan, according to Edward Lincoln, a New York University professor who directs the school’s Center for Japan-U.S. Business and Economic Studies. Price pressures may already emerge as a result of a jump in demand for goods after the quake.

“If the Bank of Japan takes this opportunity to follow a somewhat more expansionary monetary policy, that would also underwrite a shift toward inflation rather than deflation,” said Lincoln, who was an adviser to then-U.S. Ambassador to Japan Walter Mondale in the Clinton administration. “There’s no guarantee.”

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