The Bank of Japan on Wednesday decided to loosen the yen spigots and force-feed more money into the banking system, thereby seeking a united front with the government in the fight against deflation.
Belying previous statements that the move would have little effect on the economy, the BOJ Policy Board voted unanimously to pump more money into private banks’ current accounts at the BOJ to a record 15 trillion yen to 20 trillion yen, up from from 10 trillion yen to 15 trillion yen.
“We moved to match the line we think the government is about to take,” BOJ Gov. Masaru Hayami said at a news conference, acknowledging that the BOJ’s move was aimed at keeping step with government measures scheduled to be announced later in the day.
“The funds we are providing will lessen the pain of structural reform and speedy bad loan disposal,” he said.
Commercial banks are expected to to cut back on their lending, according to a BOJ economic forecast released the same day, as companies try to reduce excess debt while banks try to improve their finances by raising interest rates to meet risk.
The BOJ will watch closely for signs of a credit crunch and will study measures to secure smooth financing for companies as early as November.
Economists agree there is never a good time for bad-loan disposal, but it must be carried out at one point or another.
The BOJ’s outlook for the next year underlines this fact.
No clear signs of recovery will materialize by March, the BOJ said. This constitutes an admission that its spring forecast of a recovery during the current fiscal year was overoptimistic.
The central bank also said that domestic private demand is unlikely to pick up.
Even if the economy begins to recover in fiscal 2003, on the assumption that overseas economies will gradually improve, recovery will be “quite modest,” it said.
“The liquidity we are providing will eventually reach households and companies and lead to increased spending,” and provide a springboard for demand, Hayami said.
Thus far, however, money pumped into the system has not triggered further spending as banks are loaded with bad loans and are unable to take risks, he said.
Also Wednesday, the BOJ increased its outright monthly purchases of long-term government bonds from 1 trillion yen to 1.2 trillion yen.
Prices have been falling for four years, and the BOJ has been under constant pressure to concede to government demands for further credit-easing measures.
A recent pattern has seen the central bank loosen its grip on credit, wait in vain for government reform promises to materialize and then come under political pressure to ease again.
In private, BOJ officials are the first to admit they are poor political players in comparison to old-guard politicians.
“The BOJ has always been the first to move. Then they end up holding on to the loose end as promises fail to materialize,” said Akio Makabe, senior economist at Mizuho Research Institute.