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Strategies & Market Trends : MDA - Market Direction Analysis

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Dec 2 4:00 PM EST

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To: pater tenebrarum who wrote (34958)	12/9/1999 7:19:00 PM
From: Don Green	Read Replies (1) of 99985

BOJ Watch: Bank Holds Firm On 1 Trln Yen In Excess Reserves Friday, December 10, 1999 TOKYO (Nikkei)--The Bank of Japan is adhering closely to its daily pattern of keeping excess reserves in the money market right at 1 trillion yen. In fact, the bank conducted bill sales to drain reserves Thursday, bringing down the level of surplus funds in the money market for the day from roughly 2 trillion yen to 1 trillion yen. "It is hard to find a logical reason for the 1 trillion yen figure," one BOJ insider concedes. The BOJ was virtually forced into a debate over a quantitative policy easing once it adopted a zero interest rate policy under which it lost the flexibility to lower short-term interest rates further. Given the external pressures to adopt a quantitative easing, the level of excess reserves in the system is playing a role as a quasi-quantitative target, some BOJ watchers say. Although the central bank has firmly denied any such intention, the 1 trillion yen level has taken on a life of its own, serving as the focal point of what amounts to a prearranged harmony between the BOJ and the money market. But the bank's aggressive injections of funds maturing after Dec. 31 will result in surpluses in the money market for the rest of the year. If the BOJ is to stick to a 1 trillion yen target, it will have to drain reserves daily. It may have signaled just such a commitment by announcing operations for Friday and next Wednesday to remove a total of 1.5 trillion yen from the money market. BOJ watchers say the central bank does not want to suddenly deviate from the 1 trillion yen level because such a move could roil not only the money market but also the currency markets. Even so, the BOJ may have a natural way out. It will be easy for it to justify an expansion of excess reserves toward year-end if a volatile surge of funds demand emerges. (The Nikkei Financial Daily Friday edition)

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