Japan Brief/FPCJ, No. 0974
December 4, 2009


Bank of Japan Pumps Additional Money into Banking System

The Bank of Japan on December 1 decided on a new policy to pump low-interest, three-month loans, up to 10 trillion yen, into the banking system effective immediately. The BOJ acted in recognition of the deflationary state of the Japanese economy, which the government had earlier acknowledged, and also out of concern about a possible further deterioration of the nation’s recession-hit economy caused by the surge of the yen to a 14-year high against the dollar.

It has been reported that under the new scheme the central bank is to pump money into the banking system with interest fixed at 0.1% for three months against government bonds, municipal bonds, corporate bonds, or commercial papers as collateral. The operation will be carried out once a week on a scale of 800 billion yen each time up to a total of around 10 trillion yen. Although it is intended to lower longer-term interest rates closer to the benchmark rate of 0.1% on overnight interbank transactions, BOJ Governor Masaaki Shirakawa described the scheme as a “quantitative easing of money in a broad sense.”

The decision, reached at a hastily convened emergency meeting of the central bank’s policy board, was regarded as indicating a major turnabout of the BOJ’s rather lukewarm position toward the government’s “deflation declaration” made by Deputy Prime Minister and Minister of State for Economic and Fiscal Policy Naoto Kan on November 20. Since Shirakawa had “avoided making clear whether he agreed or not to the notion of deflation,” the central bank had come under increasing criticism from the government for being too optimistic (as The Nikkei reported on December 2). The BOJ had apparently been requested by the government to be more alert to the grave situation of the domestic economy, which acquired an added urgency when the Japanese currency soared to a rate of 84 yen to the dollar, a 14-year high, on November 27 in the wake of the Dubai shock, sending the Nikkei stock average plunging more than 300 points.

Prime Minister Yukio Hatoyama and BOJ Governor Shirawaka met on December 2 and agreed to work closely together to get the Japanese economy out of deflation. The meeting came at a time when the government is particularly concerned about a possible worsening of unemployment as the year-end approaches.

The government on its part decided on December 3 to put together a stimulus package, to be included in this fiscal year’s second extra budget, worth over 7 trillion yen, including 4 trillion yen in fiscal money, a considerably larger amount than earlier expected. Since the package is subject to Diet approval and its impact will take until spring to be felt in the economy, however, the government is leaning on the central bank for stimulation of business for the time being (as the Asahi Shimbun reported on December 2).

The “new-type” operation by the BOJ received a lukewarm response from the market, though. While the scheme has halted the steep hike of the yen for the time being, it alone is not expected to lead to stepped-up capital spending by manufacturers, which is weak for the fundamental reason of deficiency of aggregate demand.

According to newspaper reports, under the circumstances, depending on how the economy will go, the central bank is likely to come under pressure from the market to take more aggressive steps, such as the purchase of long-term government bonds and the adoption of a zero-interest policy, about which the bank still remains cautious.

Major Newspaper Editorials

The Nikkei and the Asahi asserted that the central bank must come out more decisive in its fight against deflation. The Nikkei’s December 2 editorial asserted, “Governor Shirakawa says the new policy might be described as a quantitative easing, but on the other hand he would not clarify how long the policy will continue and he does not look confident about its effects. Above all, he shows no sign of a decisive will to overcome deflation. It remains ambiguous whether the new policy will be a clear-cut message to bring to a halt the hike of the yen and a decline of share prices and prevent a second slump of business.”

The Asahi also argued in its editorial on the same day that “It is unfortunate, however, that both the policy and the message lack punch. The need for further ingenuity and boldness in slamming the brakes on the vicious circle of deflation and the yen's appreciation is likewise clear from the reactions of foreign exchange markets on Tuesday. Naturally, as long as the root cause of deflation lies in massive demand deficiencies, monetary policy alone will not be enough to get the job done.”

In contrast, the Sankei Shimbun and Yomiuri Shimbun demanded stronger action on the part of the government. The Sankei said in its December 2 editorial, “The Bank of Japan finally has reached a point where it shares with the government the recognition of deflation. The market will carefully watch the measures the government will take. But the Hatoyama government’s economic policy is unclear about a growth strategy needed to create demand.” It added, “The prime minister should be aware that the financial market’s distrust of the Hatoyama administration, which lacks a strategy, is ‘reaching a peak.’”

The Yomiuri argued in its editorial on the same day, “The government's finances are in critical condition, but it may now be necessary to concentrate the budget on projects with high reflationary effects even if the government has to increase the issuance of bonds to a certain degree. However, if the increased issuance of government bonds causes a sharp rise in long-term interest rates, the business climate will suffer strong side effects. The Bank of Japan will be required to support the government financially by buying more government bonds.”

The Mainichi Shimbun, meanwhile, issued a stern warning against what it perceived as reckless fiscal positivism. It emphasized that the stronger yen and falling prices are not something that can be combated with makeshift “countermeasures.” Its editorial of December 2 said that “these issues are deep-rooted problems that must be tackled over the long term.” It went on, “The government is not justified to excessively focus on the ‘Dubai shock,’ ‘deflation,’ or ‘the rising yen,’ to use them as an excuse to shelve long-term issues that must be addressed, such as fiscal rehabilitation. It is out of the question to press the Bank of Japan to buy government bonds only to boost the state’s debts.”

(Copyright 2009 Foreign Press Center, Japan)

*Japan Brief is an original production of the Foreign Press Center, Japan, and does not represent the views of the Government of Japan or of any other body.


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