BoJ's bill auction fails first time in two years
Wed Feb 2, 6:10 AM ET
By David Pilling in Tokyo
The Bank of Japan on Wednesday failed to attract enough offers in a bill-buying operation for the first time in nearly two and a half years, raising speculation that the central bank may struggle to meet its ultra-loose liquidity targets.
The BoJ conducts money market operations aimed at keeping the balance of current accounts deposited at the central bank between Y30,000bn and Y35,000bn. Because interest rates have long been at zero, the bank has flooded the markets with liquidity in an effort to head off systemic risk and rid the economy of deflation, which has dogged the economy since the mid-1990s.
On Wednesday, the BoJ sought to buy Y1,000bn of discount bills, but offers from financial institutions - already flush with cash - fell below Y700bn. The shortfall was even more shocking given that the BoJ was conducting a powerful "all offices" transaction in which its regional branches also participated.
The BoJ said the bid had failed for technical and timing reasons. It pointed out that it had succeeded in meeting its overall liquidity target. The provisional figure for the current account balance stood at Y30,440bn on Wednesday.
The central bank has occasionally failed in other types of operations as well, including those for short-term treasury bills.
If problems persist, markets may speculate that the BoJ will be forced to lower its liquidity target. Minutes of a December policy board meeting released last week revealed that two board members are already in favour of cutting the target, even though deflation has not yet been beaten.
Any lowering of the target would represent be a turning point in monetary policy, signalling the possibility of tightening ahead. That could disturb bond markets, analysts said, potentially pushing up longer-term interest rates.
The BoJ on Wednesday sought to stamp on such speculation, saying that technical difficulties in money market operations would not influence monetary policy.
Some economists have urged the BoJ to consider raising targets again, rather than cutting them, as a way of demonstrating its determination to restore price stability.
Ironically, the difficulty in conducting money market operations reflects an improvement in the health of the banking sector, which has made big strides in ridding balance sheets of non-performing loans. By March the ratio of NPLs to total loans is expected to be at 4 per cent for all the big banks.
The BoJ's board has predicted a return to inflation of 0.1 per cent in the year to March 2006, though officials admit this goal could be hard to attain if wages continue to fall.
Banks' loan books are continuing to shrink because of the reluctance of corporate Japan to borrow and wages are still in decline despite nearly three years of economic growth.
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