The Bank of Japan may seek next week to counter a contraction of its balance sheet caused by the monthend expiration of an emergency-credit program and persistent deflation.
The BOJ’s options include expanding a ¥10 trillion fund providing loans to banks, according to two central bank officials who spoke on condition of anonymity. The March 16-17 policy meeting comes days before the March 31 end of an unlimited collateralized loan facility.
By making some announcement about sustaining the BOJ’s ¥19 trillion balance-sheet expansion, Gov. Masaaki Shirakawa may reassure investors and politicians anticipating additional liquidity. The central bank may want to save broader measures for April, when officials can discuss coming household and business confidence surveys and updated economic forecasts.
“The BOJ would run a bigger risk if it takes no policy action this time, even though the board members probably hope to preserve easing options as much as possible,” said Hideo Kumano, a former BOJ official and now chief economist at Dai-ichi Life Research Institute in Tokyo. The central bank will likely modify the ¥10 trillion program “and try to maintain the level of ample liquidity it has provided up to now,” he said.
The BOJ has lent ¥9.6 trillion under the three-month bank loan program that was introduced in December, close to the current limit. In the unlimited lending facility set to expire this month, there was ¥5.9 trillion outstanding as of Feb. 28. Both facilities offer three-month credit at 0.1 percent.
Central bankers have overseen an 18 percent expansion of their balance sheet, to ¥126.8 trillion, since before the September 2008 Lehman Brothers Holdings Inc. collapse intensified the credit crisis.
Local media reports last week said the BOJ was likely to consider more measures, without citing a source for the information.
Plugging the hole left by the expiry of the unlimited credit program may help restrain the yen, which at around 90 per dollar hovers above companies’ break-even level of ¥92.90, weighing on the export-driven recovery.
One risk is investors see a balance-sheet adjustment as insufficient, said Naka Matsuzawa, chief investment strategist at Nomura Securities Co. in Tokyo.
“If the BOJ increases the ¥10 trillion program to ¥15 trillion, investors won’t take it as additional easing” because it would barely substitute for the cash under the expiring plan, Matsuzawa said. The central bank needs to increase the December program by more or extend the maturity to six months to show it’s injecting more money, he said.
While another option is to increase government bond purchases beyond the current ¥1.8 trillion a month, central bankers have warned of the dangers of appearing to finance the nation’s fiscal deficit.
“Buying more bonds would be a very difficult option for the BOJ unless the government publishes a very convincing fiscal rehabilitation plan and disperses concerns about Japan’s fiscal discipline in markets,” said Yasunari Ueno, chief market economist at Mizuho Securities Co. in Tokyo.
The focus on the potential for further monetary easing is in contrast with major central banks around the world, which from China to India to the U.S. are withdrawing liquidity from their banking systems. Policymakers in Australia, Malaysia and Vietnam have started raising interest rates.
The BOJ unveiled the lending program for commercial banks in December after the yen surged to a 14-year high and government officials, including Finance Minister Naoto Kan, urged the central bank to do more to stem deflation.
BOJ officials who have spoken publicly since the last meeting have indicated they haven’t changed their views of the economy. Board members Miyako Suda and Tadao Noda said in the past week the economy will keep improving and its upside and downside risks are almost balanced.
Since Shirakawa and his colleagues last met, reports for January have shown the export-led recovery remains intact, backing up the BOJ’s assessment that the economy is “picking up.”
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