BOJ’s independence is called into question

by Mai Iida

Kyodo News

The Bank of Japan’s decision to provide around ¥10 trillion of liquidity amid pressure from the government is raising concerns among market watchers that the central bank’s independence may be at risk.

When the BOJ said Tuesday morning it would hold an emergency policy meeting later in the day, some investors were surprised, driving stocks higher and sending yields on government bonds lower. But market reaction to the meeting’s outcome showed that the new operation fell short of investors’ expectations.

The dollar rose to the mid-¥87 level following the announcement that the BOJ would hold the emergency confab, but the greenback lost some of its momentum following the meeting, which came after the stock and bond markets closed.

“Financial markets generally took the BOJ’s decision as lacking vigor and a little disappointing,” said Takahide Kiuchi, chief economist at Nomura Securities Co. “It seems that the BOJ has barely avoided giving a ‘no answer’ to strong pressure from the government to address deflation.”

The central bank is expected to implement further monetary easing next year as it will likely come under constant government pressure and face the need to cope with the rising yen, Kiuchi said.

“This operation would be the first step” toward further monetary easing, he said.

The economy has emerged from its worst recession in decades, with gross domestic product expanding for the second consecutive quarter through the July-September period.

But the prospects for recovery have become increasingly gloomy amid heightening concern over deflation and the yen’s appreciation, which erodes exporters’ earnings.

Prime Minister Yukio Hatoyama’s government, facing an Upper House election next summer, is desperate to avoid a double-dip recession.

The government plans to compile an additional stimulus package this week to cope with the rising yen and falling stock prices as debt problems in Dubai rekindled worries over the global turmoil.

Under the new liquidity scheme, the BOJ will lend funds worth a total of ¥10 trillion to financial institutions for three months at a fixed interest rate of 0.1 percent against collateral, including government bonds and corporate debt.

Some observers say the step is somewhat similar to the BOJ’s temporary low-interest loan program that will expire at the end of March.

The BOJ decided in October to start unwinding at the end of this year the emergency measures, including the loan program, it introduced to deal with the global financial crisis.

BOJ Gov. Masaaki Shirakawa, however, said there is no inconsistency between that decision and its announcement Tuesday of additional monetary easing.

“I do not believe we are straying,” Shirakawa said after the policy meeting.

But some market observers question the effectiveness of the BOJ’s new step in both stabilizing financial markets and constraining deflation.

“There remains room for doubt about the effectiveness of (only providing) three-month money,” said Osamu Takashima, chief currency analyst at Bank of Tokyo-Mitsubishi UFJ.

He said the markets had expected the BOJ to provide much longer-term money that would be more effective in stabilizing the financial market. But still, he said, “It is better than doing nothing.”

In the face of a shortfall in tax revenue, the government led by the Democratic Party of Japan is finding it difficult to raise enough money for its key policies without increasing the nation’s already ballooning debt.

Analysts say the support the government wants from the BOJ appears to include an increase in the purchase of government bonds.