BOJ mulling easing again

Friday 5th March 2010

The Bank of Japan is examining a further easing of its ultra-loose monetary policy and may decide on such a move this month, the Nikkei newspaper reported, weakening the yen and lifting government bond futures to a two-month high.

The government, its fiscal options limited by a ballooning fiscal debt, has been pressuring the BOJ to do more to beat deflation even as most other major central banks mull rolling back stimulus steps put in place during the global crisis.

Finance Minister Naoto Kan said he would welcome any BOJ measures to help beat deflation but had not heard directly from the central bank about what it was considering.

Another policy easing could raise questions about the BOJ's independence after it buckled under government pressure in December and expanded its supply of funds to financial markets.

"Probably without government pressure, maybe the BOJ would stand pat," said Naomi Hasegawa, a senior fixed-income strategist at Mitsubishi UFJ Securities Japan.

"The government wants the BOJ to do something more toward the end of the fiscal year (on March 31). In addition, there are uncertainties in financial markets, especially FX, because of the Greek fiscal problems etc," she said.

The BOJ's likely aim would be to prevent further yen gains and stock declines from hurting corporate sentiment, she said.

The BOJ board will debate whether to expand the fund-supply operation it put in place in December, in which it extends loans to commercial banks at the policy rate of 0.1 percent, the paper said.

It will either boost the amount of funds it supplies in the operation from the current 10 trillion yen ($112.1bn) or extend the duration of the loans to six months from the present three months, the Nikkei said without citing sources.

After March's rate review the BOJ board will then meet twice in April. An expansion of the central bank's fund-supply operation has been cited by markets as the most likely option.

"I haven't heard directly from the BOJ about what it plans to do," Kan, who is also deputy prime minister, told reporters after a cabinet meeting.

"The BOJ governor and deputy governor have appeared regularly in parliamentary committees, where I've repeatedly said the government will do more to end deflation and that I hope the BOJ also does more. The BOJ could be responding to that."

But the Nikkei said some board members were cautious about loosening policy further with the economy now in relatively good shape, so a decision may be delayed until April, it said.

Noda: No need to ease more
BOJ board member Tadao Noda said he saw no need for further easing now, and he also ruled out increasing the amount of government bonds the bank purchases.

The reported move would likely be aimed at pushing down longer-term money market rates, such as six-month to one-year borrowing costs, to encourage spending by households and companies. Lower yen borrowing costs would also help prevent sharp rises in the yen from hurting exports, a driving force behind Japan's fragile recovery, the Nikkei said.

"I don't think the yen will weaken sharply just because of this, but it would be positive for the economy," said Takuji Aida, a senior economist at UBS Securities in Tokyo.

Deflation can be debilitating because consumers and companies tend to delay spending as they expect prices to keep falling. It can also make monetary conditions tighter than they appear, because real interest rates are higher than nominal rates.

Economists have argued that the BOJ needs to do more, and that it has damaged its credibility by not being more aggressive. They also say increasing short-term funding would not have much impact as it would not allow the BOJ to expand its balance sheet as the Federal Reserve and other central banks have done after the global financial crisis.

"The most direct way to do quantitative easing is to go out and buy assets," said Simon Wong, regional economist at Standard Chartered in Hong Kong.

"The BOJ hasn't done much to ease deflation, which has already hurt its credibility a bit. If you have an expansionary fiscal policy without an expansionary monetary policy, you end up with higher long-term yields."

The finance minister has been escalating pressure on the BOJ, expressing his desire to target inflation and urging the bank to help the government drag the economy out of grinding deflation.

Such remarks by cabinet ministers are likely driven by the need for the Democratic Party-led government to look proactive ahead of an upper house election expected in July, especially since Prime Minister Yukio Hatoyama's ratings are dropping due to funding scandals and doubts about his leadership.

The BOJ has said it is committed to fighting deflation after the government increased pressure on the central bank last year but has offered few clues on what it could do in the future beyond keeping interest rates near zero for as long as necessary.

The BOJ is unlikely to increase its long-term government bond purchases, a move favoured by some within the government, for fear such a move could be interpreted by markets as monetising debt and trigger sharp bond yield gains, the paper said.

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