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To help stabilize financial markets, the Bank of Japan opted on the last day of its two-day Policy Board meeting Wednesday to increase its purchases of Japanese government bonds from banks.

Starting this month, the BOJ will increase its annual JGB purchases to ¥21.6 trillion from ¥16.8 trillion, up ¥4.8 trillion. On a monthly basis, it means buying ¥1.8 trillion worth of JGBs, instead of ¥1.4 trillion.

With little room left to cut interest rates, the board also will leave the uncollateralized overnight call rate at around 0.1 percent.

“It is likely the severe financial and economic conditions will persist even after the beginning of the new fiscal year” that starts next month, BOJ Gov. Masaaki Shirakawa said at a news conference. “The bank judged continued provision of substantial liquidity is required to ensure stability in financial markets.”

Some economists welcomed the decision.

“Since demand for liquidity is also increasing in Japan, further measures were taken to supply money” to financial markets, commented Katsuhiro Oshima, an economist at Mitsubishi Research Institute Inc.

In a move to spur lending and ease a worsening credit crunch, the BOJ said Tuesday it would take the unusual step of buying subordinated loans from banks.

“We recognize (that the BOJ) is doing what it can,” Oshima said.

Hideki Hayashi, chief economist at Shinko Securities Co., agreed.

“Shirakawa has been extremely alert about the prospects for the Japanese economy and financing for corporations and financial institutions, and positively hammering out various policies,” Hayashi said.

Until a recovery is in sight, Oshima expects the central bank to publicly announce it plans to keep its benchmark rate near zero and bring long-term interest rates lower.

Hayashi suggested the BOJ will inevitably have to shoulder more of the credit risks plaguing banks, and act together with the government.

The BOJ meanwhile noted that exports are still falling and domestic demand has weakened along with corporate profits, worsening employment and declining household income.

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