The Bank of Japan eased monetary policy Monday by pledging to buy risky assets such as exchange-traded funds at double the current pace, joining global central banks in combating the widening economic fallout from the coronavirus epidemic.
The central bank also decided to create a new loan program to extend one-year, zero-rate loans to financial institutions in an effort to boost lending to firms hit by the virus outbreak.
“The BOJ will take additional monetary easing steps as needed without hesitation with a close eye on the impact from the coronavirus epidemic for the time being,” it said in a statement after an emergency Policy Board meeting.
The BOJ said it will “aggressively” buy exchange-traded funds (ETFs) at an annual pace of around ¥12 trillion ($112.55 billion), double the amount it had pledged to buy till now.
It will also double the pace of purchases for Japanese real estate trust funds (J-REIT) to ¥180 billion per year.
In a bid to prevent credit markets from freezing up, the bank will set aside ¥2 trillion for additional purchases of commercial paper and corporate bonds.
The BOJ left unchanged its minus 0.1 percent short-term interest rate target and a pledge to guide long-term rates around zero percent.
“Japan’s economic activity is likely to remain weak for the time being, mainly affected by the coronavirus outbreak,” the BOJ said in the statement. “Thereafter, it is expected to return to a moderate expansionary trend.”
Prime Minister Shinzo Abe welcomed the BOJ’s decision as “swift and appropriate” in light of recent market turbulence.
But investors were less impressed, with the Nikkei 225 stock average slumping 2 percent.
“Compared with other central banks such as the Fed, the BOJ’s steps lacked boldness. It clearly showed there’s little room left for the BOJ to ease further,” said Toru Suehiro, senior market economist at Mizuho Securities.
“The BOJ probably saved its limited ammunition, such as deepening negative interest rates, for when it faces a sudden yen spike,” he said.
Monday’s Policy Board meeting replaced a regular rate review that was initially scheduled for Wednesday and Thursday.
BOJ Gov. Haruhiko Kuroda told a news conference later in the day that the bank expects the impact of the virus to “continue for some time.”
“There are so many uncertain factors. It is necessary that we continue to fully monitor the economic situations at home and abroad,” he said. “Coronavirus or not, if there is downward pressure on the economy and prices, we will consider additional monetary easing measures to deal with it.”
The BOJ’s review comes in the wake of the U.S. Federal Reserve’s emergency 100-basis point rate cut to near zero on Sunday, which was followed hours later by an unexpected 75 basis point easing by the New Zealand central bank, underscoring policymakers’ worries of a world economy unraveling rapidly amid the epidemic.
The epidemic has spread rapidly around the world, killing over 5,800 people and infecting more than 156,000, putting many countries on virtual lockdown and severely disrupting global economic activity.
Abe has said his government will work closely with the BOJ to take “bold, unprecedented” measures to mitigate the pain the epidemic is inflicting on the world’s third-largest economy.
Under a policy dubbed yield curve control (YCC), the BOJ guides short-term rates at minus 0.1 percent and the 10-year government bond yield around zero. It also buys risky assets such as ETFs.
Six central banks, including the BOJ, the Fed and the European Central Bank, also said they will take coordinated action to enhance the provision of U.S. dollar liquidity.
Abe said Monday the leaders of the Group of Seven industrialized counties will hold an emergency video conference at 11 p.m. Japan time to discuss their response to the global spread of the coronavirus.
The spread of COVID-19 has weighed on economic activity in the tourism, retail and manufacturing sectors.
Kuroda said earlier this month in a rare emergency statement that the BOJ will make every effort to provide ample liquidity and ensure stability in financial markets. However, recent sluggish domestic economic data has increased pressure on the bank to take additional steps.
Japan’s economy shrank an annualized real 7.1 percent in the October-December quarter, its sharpest fall in more than five years, due to the consumption tax hike and devastating Typhoon Hagibis last year.
Many analysts are concerned that the economy may post negative growth in the January-March period for the second consecutive quarter due to the coronavirus outbreak, which emerged in China late last year.
Overnight, the Fed slashed rates back to near zero, restarted bond buying and joined with other central banks to ensure liquidity in dollar lending to help put a floor under a rapidly disintegrating global economy during the coronavirus pandemic.
And in a dramatic move that underscored the depth of the economic threat as businesses shutter and potentially millions of jobs evaporate, the Fed encouraged banks to tap trillions of dollars in equity and liquid assets built up as capital buffers since the financial crisis to support firms and people whose lives have been upended by the virus.
“The virus is having a profound effect on people across the United States and around the world,” Fed Chairman Jerome Powell said during a news conference after cutting short-term rates to a target range of zero percent to 0.25 percent, and announcing at least $700 billion in Treasuries and mortgage-backed securities purchases in coming weeks.
“We really are going to use our tools to do what we need to do here,” Powell said, adding that the Fed has gone in “strong” and could increase bond-buying and use other tools to support market functioning and the flow of credit, what he called the Fed’s “most important” function.
As governments restrict gatherings, businesses and schools close, and families begin to hunker down in an effort to reduce the spread of the virus, Fed officials will “do what we can to ease hardship” as economic activity slows this quarter and next, he said.
Powell said he could not say how long or how big the downturn will be but promised to keep rates where they are until Fed officials are “confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.” The Fed will delay official economic forecasts until June, he said.
The Fed and other major foreign central banks also cut pricing on their swap lines to make it easier to provide dollars to financial institutions around the world facing stress in credit markets.
The action amounted to an implicit acknowledgement that the outbreak was bringing economic activity in the United States and abroad to a “sudden stop,” said Sebastian Galy, senior strategist for Nordea in Luxembourg.
And Julia Coronado, president of MacroPolicy Perspectives and a former Fed economist, said she thought still more help may be on the way.
“I think this is the start and not the full scope of what we’re going to see,” she said, adding that the Fed may coordinate with the U.S. Treasury to launch other emergency lending tools, including one aimed to add liquidity to short-term corporate credit markets.
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