Tuesday, 30 October 2012

Bank of Japan Announces Fresh Economic Stimulus

TOKYO — The Japanese central bank announced fresh measures on Tuesday to ease monetary policy, stepping up its bid to fend off recession in the world’s third-largest economy after the United States and China.
The Bank of Japan, under pressure from the government to act more decisively to halt the economy’s slide, said in a statement that it would add ¥11 trillion, or $138.5 billion, to an asset-buying program that has become its main monetary policy tool.
The bank will also set up a new loan program to supply banks with cheap long-term funds, a bid to pump more money into the Japanese economy to encourage growth. As expected, the bank decided to keep its benchmark interest rate at a range of 0 percent to 0.1 percent.
The Bank of Japan’s governor, Masaaki Shirakawa, said that the easing measures would stay in place until Japan achieved an inflation level of at least 1 percent.
The measures come as Japan confronts economic data that suggest its fragile recovery is threatened. The economy grew at a healthy clip earlier this year, helped by the huge reconstruction effort that followed the 2011 earthquake and tsunami. But a slowdown in exports and industrial output, brought about by the global slowdown and a continued territorial spat with China, a major trading partner, is threatening to hobble that growth.
The dispute, which intensified in September, has led to boycotts of Japanese brands among Chinese consumers, forcing Japanese exporters to scale back their sales forecasts in an important market.
Meanwhile, Japanese industrial output fell by 4.1 percent in September from August, and by 8.1 percent from a year earlier, data released Tuesday showed. Exports have also shown signs of a slowdown, and price data show the economy remains mired in deflation, a damaging drop in prices, wages and profit that hampers economic activity.
Reflecting those risks, the central bank cut its own economic and price forecasts, saying it was unlikely to meet a goal of reaching 1 percent inflation by the fiscal year ending March 2014. That probably will not happen until the following year, the bank said.
“Japan’s economy is expected to level off more or less for the time being. Thereafter, however, as domestic demand remains resilient on the whole and overseas economies gradually emerge from the deceleration phase, the economy is expected to return to a moderate recovery path,” the bank said in its semiannual economic outlook, also released Tuesday.
And in a rare joint statement, the government and the Bank of Japan said they shared the goal of beating deflation. The central bank will “regularly” report its outlook on prices to the cabinet, while the government will introduce its own measures to fight deflation, the statement said.
Mr. Shirakawa said that for now, he saw increased risks for a marked slowdown in the global economy. The biggest change since the bank’s policy meeting in September, he said, was that “overseas economies seemed to be slowing down further.” That was “a big starting point” of the bank’s policy discussions, he said.
It is still unclear how far the bank will go to reverse Japan’s decade-long deflationary malaise, made worse by the country’s shrinking population. Central bankers have said that monetary policy is not enough to ease the economic problems and that the government needs to do more to facilitate growth.
Even as the central bank has flooded the economy with money, bank lending has hardly risen because companies do not feel confident enough in the weak economy to fund big investments.
The government has also thrown money at the economy, approving ¥422.6 billion in emergency spending just last week. But its ability to spend its way to economic growth is limited by a public debt burden already twice the size of its economy. Gridlock in Parliament is also blocking a bill that would allow the government to fund an almost ¥40 trillion deficit, threatening public services.
Markets were unimpressed with the central bank’s moves Tuesday, with the Nikkei 225-share index in Tokyo closing down nearly 1 percent shortly after the bank’s announcement, and the Hang Seng index in Hong Kong off 0.4 percent. The yen strengthened, hitting a one-week high of 79.25 to the dollar, bringing more pain to Japanese exporters.
“Monetary fireworks displays are not in Bank of Japan governor Shirakawa’s nature,” Nicholas Smith, Japan strategist at CLSA Asia-Pacific Markets, said in a note to clients after the bank’s decision. The bank will continue to face pressure from the government to step up its actions, and Mr. Shirakawa may be replaced when his current term ends in April, Mr. Smith said. “And if there is one thing that all major political parties can agree on, it is that the monetary future must be expansionary,” he said.

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