BOJ Official: Low Japan Rates May Have Fueled Risky Bets

Posted by: Kenji Hall on October 21, 2008

Earlier this month when the Fed and other central banks around the world conducted a coordinated rate cut to calm panicky financial markets, the Bank of Japan opted out. With its benchmark interest-rate already at a low 0.5%, the BOJ didn’t have much policy wiggle room. Instead the BOJ resorted to injecting huge sums into the money markets, to ensure that banks had ample (and cheap) cash for lending.

But other reasons for the BOJ not to take part in the rate cut have emerged. Today, at a hearing in Parliament, in Tokyo, BOJ deputy governor nominee, Hirohide Yamaguchi, told legislators that Japan’s ultraloose monetary policy could be partly to blame for financing the high-risk deals in other parts of the world. The BOJ had kept interest rates near zero for almost five years to give Japan’s economy a chance at recovery. “Some people say that a side effect of our (low-rate) policy is the yen carry trade,” Yamaguchi said, referring to how investors had borrowed money at low rates in Japan and put it into higher-yielding securities in other markets.

That rare admission from Yamaguchi, who is now a BOJ executive director, reflects the policy hand-wringing that likely played out behind closed doors over the past few weeks as global stock markets cratered. Ultimately, the bank’s policy board decided on minimal action—-a move that mutes discussion about how the BOJ may have contributed to the trades that undermined big financial institutions like now-bankrupt Lehman Brothers.

Back when the BOJ was holding rates near zero, Yamaguchi said, the bank’s first priority was helping the domestic economy. That did more good than harm, he said. This time, though, the BOJ appears to have put global considerations over the prospect of a recession and jittery investors at home—-though Yamaguchi didn’t necessarily spin it that way. As he put it in the Parliamentary hearings: “We don’t implement unnecessary policy, even if it’s requested by some other countries.”

Reader Comments

OCK

October 21, 2008 8:58 AM

The first reaction of Japan's banks in the late 80s was to sell their overseas assets and hold onto domestic assets - this was a mistake since the overseas assets then recovered by the mid 90s while the domestic assets didn't.

Now, Japan is thinking globally, but is it going to serve Japan any better, investing in overseas assets at this time when there may be better opportunities on their doorstep?

As i understand it, the low yen, resulted in speculation on currencies such the Aussie dollar and the Icelandic?? But these stories seem to be a sideshow to the shift of funds moving from bidding up the price of oil to short selling financials???

In any case, the idea of prioritising helping the domestic economy / shielding it from the global economy is kind of quaint. China's CBRC announced on Saturday that it was phasing in Basel II - a vote of confidence in a system which has not exactly saved the banking system in the west. China has tried to control both its interest and exchange rate - following in Japan's footsteps to some degree - in order to shield the agricultural sector to some degree - although they are not completely comparable - Japan is still deciding which one of the two to fix - and which to float - hopefully it won't take China becoming irrelevant to the global economy before they decide which one they won't to control, and which they let loose

Mike Murata

October 21, 2008 8:27 PM

It's funny how masochist some Japanese Official thinking can be: "Low Japan Rates May Have Fueled Risky Bets". Guns do not kill anybody, but irresponsable people (in these case American Banks) actually do gunshots. Just it.

Nippon Responsible

October 22, 2008 6:29 PM

If Wall Street is responsible for reckless lending causing the financial meltdown, for the same logic, Japan and other countries participated in reckless lending are also equally responsible for the meltdown. We saw Latin American meltdowns before caused by huge Japanese money before. Japan should not be too greedy.

John

October 23, 2008 6:13 AM

C'mon, market players always believed and were aware about risk/return relationship. So, it's time to banks, insurers, and financial institutions take the responsabilities about all mess they've done, not only the profits, or positive returns.

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