Posted by: Kenji Hall on December 19, 2008
Japan’s central bank is inching back to familiar territory. Three days after the Federal Reserve lowered interest rates to help banks and businesses raise cash and help the economy through tough times, the Bank of Japan followed suit with a policy shift of its own. On Dec. 19, the BOJ lowered its target interest rate by 20 basis points to 0.1% and announced a series of steps aimed at keeping money freely circulating in the financial markets. The BOJ also cut the rate at which banks borrow directly from it.
The move left Japan’s interest rates a whisper above zero and showed BOJ Gov. Masaaki Shirakawa’s determination to keep financial turmoil at bay. Economist and BOJ officials were quick to point out that the central bank hadn’t returned to a zero-interest-rate policy of so-called quantitative easing. That five-year policy lasting until March 2006 had been an extreme test of the BOJ’s ability to ensure that ailing cash-strapped banks could tap the financial markets for the funding they needed to stay afloat.
Can cutting rates by a fraction of a percent matter much when they’re already so low? It won’t mean much for most ordinary Japanese, who won’t be borrowing and spending as usual. While banks and consumer finance companies might charge less on interest for the loans they offer, the discount won’t likely attract much notice or business. And anyone who has cash stashed in a bank account will earn even less than the pittance they were getting before. “There won’t be an immediate impact on the economy,” says Credit Suisse economist and former BOJ official Hiromichi Shirakawa.
But there will eventually if things work out as the BOJ hopes. The targeted beneficiaries: banks and businesses. Theoretically, lower Japanese rates would sap some of the yen’s strength since it would encourage investors to invest their money in countries where yields are higher. If that happens, the yen could fall from its 13-year highs dollar. The strong yen has severely eroded Japan Inc.’s overseas profits, and is partly to blame for the lower-than-expected earning outlook of blue chips such as Toyota, Honda, Sony and Sharp.
The BOJ’s action also assuages fears of a credit squeeze because it’s designed to open the cash spigot. .In recent months, Japan’s market for commercial paper, which companies sell to investors to get funds for day-to-day operations, had become too expensive to all but a few of the largest, most financially stable businesses, market watchers say. In recent years until 2007, CP issuances had been gaining at the rate of 10% annually. Many businesses have since turned to banks for loans instead. “Two or three weeks ago, the rates on commercial paper rose sharply and issuance fell,” says RBS Securities’ Nishioka.
That’s a worry because demand for credit usually spikes toward the end of the Japanese fiscal year in late March, and there’s a limit to the amount of credit banks can extend. To ensure that there’s plenty of money to go around, the BOJ said it would temporarily start buying commercial paper from financial institutions, something the Fed has begun doing but the BOJ was reluctant to do because of the investment risks. The bank also plans to increase the amount of Japanese government bonds that it’s been buying from banks every month to 1.4 trillion yen ($15.7 billion) from 1.2 trillion ($13.5 billion), and it’s broadening the types of bonds it will buy.
Investors didn’t seem particularly impressed by the BOJ’s policy change, though. The yen slid briefly to around 89 yen to the dollar before rising again and Tokyo’s benchmark Nikkei 225 stock index ended 0.9% lower on the day.
Critics of the BOJ say its policymakers should have been more aggressive. The bank should have pledged to increase the amount of money in circulation, they say. “The market wants the BOJ to print money more aggressive and BOJ policymakers know that,” says Credit Suisse’s Shirakawa. “But there’s still no sense of crisis at the BOJ.”
Others, though, think it’s only a matter of time before the BOJ goes in that direction. The difference between 0.1% and zero isn’t merely cosmetic. BOJ chief Shirakawa said that none of the bank’s eight board directors felt that pushing rates to zero would do much good. He has previously said in public remarks that the BOJ’s ultraloose credit between 2001 and 2006 led the biggest banks to lay off their money market traders; money market traders had nothing to do because the BOJ was practically giving away money for free. BOJ officials have said that it took time for those key banks to retrain and rebuild their teams.
The BOJ won’t want to repeat that scenario. It also will want to leave itself some wiggle room to act again if things get worse. Both the Japanese government and the BOJ said it was unlikely that the economy would expand next fiscal year, starting in April. This month’s BOJ Tankan survey of corporate sentiment suffered the largest drop in more than three decades. And the BOJ says the recession could last longer than they expect.