BOJ decision said to be ambiguous

by Tomoko Otake

The Bank of Japan’s decision Monday to leave the “zero-interest-rate” policy unchanged did not surprise many, given the shock financial markets received from the virtual bankruptcy last week of department store operator Sogo Co.

But the decision, which extends the temporary 17-month-old policy for at least another month, leaves one question unanswered:

If Sogo’s collapse can affect monetary policy, what else can?

Sogo’s failure only means there is one less heavily indebted company for whom survival hinges on whether a main bank’s “rescue plan” can be implemented. “Rescue plan” has become a euphemism for massive, though partial, debt forgiveness.

Because of public pressure on the governmental Deposit Insurance Corp., which had decided to use taxpayer money to write off 97 billion yen in loans, Sogo’s rescue plan was more or less unofficially rescinded.

If some of these firms, including major general contractors and real estate companies, go bust, the BOJ will again face the difficult task of determining what their impact will be on markets and on business sentiment, and what course of action to take.

In a statement released after the meeting, the BOJ mentioned the need to ensure improvement in employment and income conditions, playing down the significance of Sogo’s collapse by mentioning Japan’s largest nonbank corporate failure as if it were a secondary issue.

But Akio Makabe, chief economist at Dai-Ichi Kangyo Research Institute, said Sogo’s failure must have weighed heavily on the policy board.

“The impact of Sogo’s collapse on Monday’s decision by the BOJ was extremely grave,” he said. “I think a selloff rush in the stock market (following Sogo’s application for court protection) gave the BOJ second thoughts on changing the policy.”

Some observers questioned the BOJ’s reasoning. Yasunari Ueno, chief market economist at Fuji Securities Co., said the BOJ has not made clear why it did not raise rates while upgrading its economic judgment in the statement.

A hike in the interest rate would have have been the first in a decade.

The central bank’s statement indeed notes several upbeat changes in the economy, such as rising corporate profits and capital investment. On prices, the bank said that “the downward pressure on prices stemming from weak demand is declining significantly, while economic recovery is expected to continue moderately.”

Furthermore, the bank gave its strongest indication yet that a rate hike is imminent, saying “the majority of the Policy Board views that Japan’s economy is coming to a stage where deflationary concerns are dispelled.”

“The BOJ has effectively declared that the economy has recovered,” Ueno said. “But the statement does not explain why such an upbeat assessment did not lead to a policy change . . . The comment (and decision) are contradictory.”

Other BOJ watchers argued that the central bank should have held a news conference to clarify any ambiguities. Instead, the bank has left the market with a sense of distrust.

Since the BOJ has deferred raising interest rates, its next window of opportunity will open Aug. 11, when the Policy Board meets again to discuss monetary policy.

But some experts said a rate hike next month is unlikely because the BOJ will not be able to accumulate enough evidence to judge whether the economy has improved by then.

Ueno said the chance of the BOJ abandoning the policy by the end of the year has significantly dwindled.

“The BOJ missed a perfect chance (for a rate hike),” Ueno said. “It seems that the chance of abandoning the policy by year’s end now stands at 50 percent — at best.”