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.”