The Bank of Japan’s decision Monday for a dollar-swap accord with the U.S. Federal Reserve was welcomed by analysts, who said pumping liquidity into the banking system and helping businesses raise necessary funds are crucial to keeping Japan’s economic recovery on track.

The BOJ decided on its commitment for the Fed’s program to provide dollars to major central banks under bilateral swap accords. The recipient banks would in turn inject the liquidity into domestic money markets, where demand for dollars sharply rises as investors dump euros due to fears the sovereign debt crisis in Greece could escalate.

“Everybody might have thought they were seeing another Lehman shock,” said Masamichi Adachi, senior economist at JPMorgan Securities Japan Co., who added such fears appear to be subsiding and called the coordinated action by the central banks “significantly rational.”

After the collapse of Lehman Brothers Holdings Inc. in September 2008, liquidity evaporated in short-term funding markets, where banks lend overnight money to each other. The bankruptcy of the U.S. investment bank triggered a credit crunch in financial markets around the world, with lenders becoming skeptical of borrowers’ credit records.

When commercial banks face difficulty in accumulating funds in money markets, it normally means companies have trouble borrowing money from the lenders.

The BOJ has separately injected ample yen liquidity in the Tokyo money market as strong demand for dollars has pushed short-term dollar interest rates higher and consequently led investors to turn to yen funds for lower funding costs.

The Greek problem and its impact on global financial markets is “feared to cause jumps in short-term interest rates and in the cost for companies to raise operating money,” said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.

He said rises in the cost of accumulating necessary funds would deteriorate corporate sentiment and further undermine appetites for business investment, adding that such fallouts could critically hit the Japanese economy, which has been showing signs of recovery.

“The BOJ has presented an optimistic view of Japan’s economic outlook,” Kumano said. “So as to keep the vulnerable recovery on track, the BOJ is trying to take pre-emptive measures.”

In its biannual report released last month, the BOJ estimated Japan’s economy will grow 1.8 percent in the current fiscal year through March, up from an earlier forecast for 1.3 percent. It also suggested deflation will end in the next fiscal year, projecting a 0.1 percent increase in a key consumer price index in fiscal 2011.

As the Greek crisis hit financial markets and was feared to unsettle the global economy, “Japan must closely watch how the crisis could hit demand around the world and subsequently push back Japanese exports,” JPMorgan’s Adachi said.

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.