Recession looming but no BOJ move seen this week
Sunday August 12, 5:31 AM EDT
(Rpt of story first sent on August 9. The BOJ begins a two-day meeting on Monday)
By Yonggi Kang
TOKYO (Reuters) - Most market watchers are betting on no change in monetary policy when the Bank of Japan's (BOJ) Policy Board meets this week, despite a spate of indicators showing all the signs of an economy slipping into recession.
"I don't think the BOJ will do anything this time," said Hiromichi Shirakawa, chief economist at UBS Warburg and a former BOJ official. "Board members and other officials at the BOJ have not reached a consensus on policy direction."
However, analysts say a decision to ease monetary conditions further cannot be far off.
The board begins its two-day meeting on Monday.
Most economists agree that April-June gross domestic product (GDP) -- due to be released on September 7 -- will show a contraction for the second straight quarter, meeting a common definition of recession.
"April-June GDP data will probably come in negative, so that will offer another reason for additional easing," said Shuji Shirota, senior economist at Societe Generale Securities.
In March, the BOJ adopted a "quantitative easing" in which it effectively holds interest rates near zero by flooding the money market with liquidity so that banks' reserves piling up in their current accounts at the BOJ would stay above five trillion yen ($40 billion).
Many economists argue that this has had little or no impact on the real economy and politicians are putting pressure on the BOJ to do more, given the government's limited fiscal options.
Policy Board members, including Governor Masaru Hayami, have rebutted the criticism, saying the effect of the March easing was permeating gradually through the financial markets.
WHAT ARE THE OPTIONS?
Now that the BOJ has shifted its monetary policy target to the volume of liquidity in the money market from traditional interest rates, analysts say the most obvious way for it to ease would be by raising the five-trillion-yen current account target. In order to achieve that, the BOJ could boost its outright buying of Japanese government bonds (JGBs) from the current 400 billion yen a month.
But some economists argue the central bank could take more drastic steps.
Speculation has been rife that the BOJ is considering tackling deflation by buying dollars and pushing the yen down.
That talk gained momentum after Kunio Okina, head of the BOJ's research institute, said last month the bank should seriously consider buying foreign currencies as part of its money market operations to meet its reserves target.
A cheaper yen would boost domestic prices through higher import costs and would help the ailing Japanese economy by improving export competitiveness.
However, such a move would have to be approved by the Finance Ministry, which has jurisdiction over foreign exchange policy.
And it could be controversial abroad, perhaps sparking a reaction from the United States and Asian trading partners.
"Given the scale of Japan's economy, it will have a huge impact on its Asian neighbours so they will strongly oppose it," NLI Reserach Institute economist Yasuhide Yajima said in a research note.
"There is also a possibility that the United States might change its current strong-dollar policy," he added.
WORRIES OVER BANKS AND STOCKS
Some analysts believe that the BOJ will be watching the Tokyo stock market closely as it ponders its monetary policy options.
The central bank has no remit to bail out investors, but BOJ Governor Hayami spoke in an interview last week about helping to calm markets "should they become disruptive".
"With half-year book-closing season nearing, the BOJ cannot let stocks suffer since that is going to hurt banks' capital adequacy ratios and hence delay the process of bad loan disposals," argued Societe Generale's Shirota.
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