Japan surplus liquidity hits record level
By Gillian Tett in Tokyo
Published: September 27 2001 15:15 | Last Updated: September 27 2001 15:17
The level of surplus liquidity in Japan's financial system has surged to almost Y11,000bn in the last two days, double the level seen before the recent terrorist attacks in the US - and dramatically higher than anything ever seen before in Tokyo.
The increase has been triggered by a combination of the Bank of Japan's massive recent interventions in the foreign exchange markets and its loosening of monetary policy.
It provides a striking new sign of the unprecedented efforts that Japan is now making both to offset pressures in the financial system and prevent a sudden surge in the yen against the dollar.
And it is likely to trigger renewed debate about the efficacy of monetary policy in Japan, not least because the measures appear to be having only mixed results so far. Although the Bank of Japan stepped in to buy dollars again the yen on Thursday , for the sixth time since September 11, the currency only moved down to around Y119, about Y2 lower that its level in recent days.
Meanwhile, concerns about the financial sector continue to bubble, partly due to renewed gloom about the outlook for Japan's economy.
The Bank of Japan's complex operations in the money markets have traditionally attracted little attention from economists. However, with interest rates now virtually at zero, the Bank has recently been targetting the level of liquidity as a way to loosen monetary policy.
Until last month, it sought to ensure that the private banks maintained at least Y4,000bn of funds on deposit with the central bank each day. But last month it raised this target to Y5,000bn, to ensure that there was an even bigger overhang of "excess" funds - and push borrowing rates as low as possible. Then last week it declared it would aim for "at least Y6,000bn", to offset any turmoil from the recent terrorist attacks in the US. And the level of surplus funds has now surged even higher, because the Bank has been intervening on behalf of the Ministry to support the dollar. In particular, for the first time since the Second World War, it has not "sterilised" the intervention - meaning that it has not purchased the excess yen it has sold.
Some economists suspect that record increase is simply a temporary measure, designed to tide the financial system over the end of the first half of the financial year on September 30.
However, it comes at a time when the Bank is under heavy pressure to prevent the economy sliding into a deep recession - and Japan's policy makers increasingly at a loss about how to prevent this sharp downturn.
Data out on Friday are expected to show that Japan's level of unemployment stayed at 5 per cent for the second month in a row last month, a post-war record. Meanwhile, a closely watched Bank of Japan survey of corporate sentiment due on Monday is also projected to show a sharp fall in corporate confidence.
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