BOJ May Maintain Policy Stimulus as Recovery Weakens
Bank of Japan policy makers will probably keep their benchmark interest rate near zero this week and maintain emergency lending programs as the economic recovery shows signs of losing momentum.
While some officials are probably open to taking additional steps to strengthen the expansion, they would prefer to have additional economic figures, including the central bank’s quarterly Tankan business survey due Oct. 1, before making any decisions, central bank watchers said.
Governor Masaaki Shirakawa said Aug. 31 that he can’t be confident about the strength of the economy after global stimulus spending runs out and companies finish restocking inventories. Investors may also be growing skeptical: the Nikkei 225 Stock Average has lost about 4 percent since reaching an 11-month high on Aug. 26 as reports showed unemployment rose to a record and deflation deepened.
“The economy is still at a low level and some data show that it’s losing steam and consumer prices will keep falling,” said Naka Matsuzawa, chief investment strategist at Nomura Securities Co. in Tokyo. “So far the solid stock market has provided a buffer for the BOJ, but if stocks start to slump, the bank will consider further easing measures.”
The Nikkei gained 0.1 percent at the lunch break in Tokyo. The yield on Japan’s 10-year bond rose 1.5 basis points to 1.305 percent. The yen traded at 91.14 per dollar, a day after climbing as high as 90.21, the strongest in seven months.
Return to Growth
Shirakawa and his board will hold the overnight lending rate at 0.1 percent at the meeting ending Sept. 17, according to all 23 economists surveyed by Bloomberg News. The bank will refrain from unveiling any new steps, having already extended credit-easing programs until the end of the year, they said.
The world’s second-largest economy grew at an annual 2.3 percent pace last quarter, the first expansion in more than a year, fueled by government spending at home and abroad. Figures have since shown the revival may be in jeopardy: the jobless rate rose to an unprecedented 5.7 percent in July, machinery orders fell and household spending slumped.
“Given that it’s hard to anticipate a sustainable rebound in domestic demand, exports are crucial,” said Teizo Taya, a former Bank of Japan policy maker who now advises the Daiwa Institute of Research in Tokyo. “Even so, we can’t expect much from that front for the time being.”
Premature to Unwind
Policy makers globally remain cautious about the world economy, too. Finance chiefs of the Group of 20 nations said this month it’s premature to start unwinding record-low interest rates and more than $2 trillion in fiscal stimulus.
Central banks around the world have slashed borrowing costs since the collapse of Lehman Brothers Holdings Inc. exactly a year ago led to the worst global recession in postwar history. The Federal Reserve’s target rate for overnight bank loans is a range of zero to 0.25 percent. The European Central Bank’s key rate is 1 percent.
The Bank of Japan may at least acknowledge the return to growth by upgrading its economic assessment for the fourth time in five months.
The board may use words like “picking up” to describe the economy, after last month saying it had “stopped worsening,” said Naomi Hasegawa, a senior fixed-income strategist at Mitsubishi UFJ Securities Co. in Tokyo. She said policy makers will avoid saying Japan is in a recovery because “the unemployment rate continues to set records and a bottom has yet to be confirmed in domestic private demand.”
Deflation Obstacle
Deflation may provide an obstacle to raising interest rates even if the economy keeps growing. Consumer prices fell a record 2.2 percent in July, and policy makers are likely to forecast the slide will extend into 2011, a third year of declines, in their twice-annual outlook next month.
“The key question is when central banks start to hike interest rates, a traditional policy tool,” said Taya at Daiwa Research. “A rate increase will be a difficult option for a country like Japan, where prices will keep falling.”
Japanese authorities will hold the key rate at 0.1 percent at least through the end of 2010, according to 14 of 16 economists surveyed.
Since its most recent rate cut in December, the central bank started buying corporate debt from lenders and offering them unlimited loans backed by collateral to channel funds to companies. The board extended the programs until Dec. 31 at its July meeting, and one option for policy makers in coming months is to stretch them into 2010.
Preconditions for Change
Board members Tadao Noda and Atsushi Mizuno have said other possible steps for the bank include outlining preconditions for changing policy, as it has done in the past. When introducing zero rates in 1999, the bank promised to keep the stance until concern about deflation diminished.
The bank may also face pressure from the new government led by Yukio Hatoyama to buy more government bonds from lenders to help yields down, analysts said. It currently buys 1.8 trillion yen ($20 billion) of the securities each month.
“There is a possibility that the government will launch new stimulus plans in a few months should the economic outlook darken,” said Kiichi Murashima, chief economist at Nikko Citigroup Ltd. in Tokyo. “If so, there is a risk that the government will seek cooperation from the central bank.”