In a bid to improve the corporate outlook and fight falling prices, the policy-setting panel of the Bank of Japan decided Tuesday to further ease its grip on credit and boost liquidity by 1 trillion yen.

Against a backdrop of mounting political pressure to loosen the already ultra-easy monetary policy, the BOJ notched up target reserves held at the central bank from 5 trillion yen to 6 trillion yen to bolster liquidity in the banking system. To achieve this, it further increased its outright purchase of long-term government bonds from 400 billion yen to 600 billion yen per month.

In explaining the decision, BOJ Gov. Masaru Hayami pointed to the rapid slowdown in the global economy, declines in production and concerns about how the recent tumbles in stock prices would affect banks’ interim reports. The new policy would further support and encourage the government’s commitment to structural reform, Hayami said.

“The program of reforms hammered out by the Council on Economic and Fiscal Policy is moving forward,” Hayami told reporters, pointing to the Cabinet’s approval last week of about 900 billion yen in cuts in the fiscal 2002 budgetary request guidelines.

On the administration’s central pillar of reform — accelerating bank’s bad-loan writeoffs — Hayami praised efforts being made by banks.

But analysts said that government pressure played a large role in shaping the central bank’s decision.

One reason they gave is the BOJ’s failure to explain how the new monetary policy will affect the economy.

“The effects of additional easing are not 100 percent certain, given the already extremely low levels of both long- and short-term interest rates,” Hayami said.

The primary gain the central bank is hoping for is a psychological one, he admitted.

“Most important is how this move will represent the BOJ’s firm commitment to fight deflation and improve the public outlook,” Hayami said.

Policy board members have insisted that easing monetary policy will have little effect on the economy.

Since March, the central bank has pursued quantitative easing measures, pushing overnight interest rates close to zero by ensuring that banks hold large reserves of surplus funds.

The result is that markets have been awash with liquidity, without a significant rise in loans. Hayami argued that banks are cautious about approving loans because they are burdened by bad debt, while companies are not borrowing because they are still trying to come out from under the yoke of asset deterioration.

But Akio Makabe, chief economist at Dai-Ichi Kangyo Research Institute, said the grim economic outlook gave the BOJ little ammunition to fight off heavy pressure from ruling coalition politicians.

“It became increasingly difficult for the BOJ to paint a picture for a rebound,” Makabe said. “They had little choice but to tinker with monetary policy.”

The vote came one day after the Tokyo Stock Exchange’s benchmark Nikkei average plunged to 11,477.56, its lowest closing level in more than 16 years.

With the prospects of a U.S. economic recovery by year’s end fading, both foreign and domestic critics have been urging the BOJ to address warnings of a recession, which is technically defined as two consecutive quarters of negative growth.

Politicians, unable to reach a consensus on a political solution, have been hurling increasingly frequent verbal threats toward the central bank.

Last week, some lawmakers from the Liberal Democratic Party said they will introduce a bill during the next Diet session that would revise the BOJ Law and oblige the central bank to target a certain inflation level.

Hayami denied that political pressure had anything to do with Tuesday’s easing.

Pressure is nothing new to the BOJ, he said. “But it is true that we’ve had many kinds of stones thrown our way,” he said.

Hayami said that the Policy Board was not considering inflation-targeting at the moment, calling it an item for future study.

Politicians have also called on the central bank to adopt adjustment inflation, in which the BOJ would raise inflation to stem the tide of nonperforming loans from asset deterioration.

“Setting a target inflation rate, and then doing whatever it takes to achieve it — I’ve never heard of a more stupid policy,” Hayami said.

He said the continuing aim will be to eliminate deflation, adding, “(We) do not mind if prices rise higher.”

Ministers happy

Economic ministers on Tuesday welcomed the Bank of Japan’s move to further ease its grip on credit.

Heizo Takenaka, state minister for economic and fiscal policy, said Tuesday he expects the Bank of Japan to take a decisive stance to counter deflation following its decision earlier in the day to further ease its grip on credit.

“I hope the central bank is aware of its great responsibility as a ‘deflation fighter’ and will show people in Japan such a position more aggressively,” Takenaka said at a news conference.

The BOJ announced earlier in the day a decision by its Policy Board to raise the total amount of cash reserves in current accounts held at the BOJ by financial institutions to some 6 trillion yen from 5 trillion yen and to increase its outright purchases of outstanding long-term Japanese government bonds to 600 billion yen a month from 400 billion yen .

Takenaka told reporters he had requested that the central bank further ease its monetary stance when he attended the Policy Board meeting as a government representative Tuesday.

He said the government would have proposed the monetary easing if the BOJ had not taken such actions.

The BOJ’s move has brought about the age of the “ultra-zero interest rate,” Takenaka said, adding that the BOJ’s monetary policy, as well as the government’s structural reform, “has entered uncharted territory.”

He also said he will continue to discuss with the BOJ whether the central bank will be able to do more to stem deflation.

Finance Minister Masajuro Shiokawa called the BOJ’s decision appropriate.

Shiokawa has repeatedly said the government is concerned about price falls and that monetary policy is primarily responsible for rectifying the situation.

Economy, Trade and Industry Minister Takeo Hiranuma said in a statement, “Our ministry, for its part, has insisted that it is necessary to evade deflationary pressure by adopting aggressive monetary policy to underpin the economy in order to promote structural reform.”

He said the latest decision by the central bank came amid a deteriorating economy, adding that he expects the central bank to implement its monetary policy in a flexible and accommodating manner while closely monitoring the economy.

Takenaka also praised the BOJ move as “timely.”

“In light of structural reforms the government has been (pursuing), the latest decision is a timely step,” Takenaka said in a statement.

While urging the BOJ to continue with a “flexible” monetary policy, he expressed the government’s determination to push forward structural reforms to help revitalize the economy.

The business community also greeted the move warmly.

“We welcome the BOJ’s further credit-easing step, which we believe is in support of the ongoing structural reform efforts,” Takashi Imai, chairman of the Japan Federation of Economic Organizations (Keidanren), said in a statement.

In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.