Henry, did you see this from Morgan Stanley's website (great site, btw) ...
ms.com
key quote:
"There could be information that the BoJ has
which (1) has not been released to the public, and (2) might have
triggered the action of the Policy Board. It is fruitless to speculate
on what this information might be. However, the suddenness of the action
and the immediate reaction of market participants who thought that
financial instability fears might have been the reason both support the
view that this action will likely be interpreted as taking the lead
ahead of some other announcement."
Japan: Surprise Rate Cut: Does the BoJ Know Something?
Robert Alan Feldman (Tokyo)
The Bank of Japan has just released a memo with its explanation of the
sudden rate cut.
First, the BoJ noted that the new call target would be 0.25%, but added
that this target would be ignored if financial system stability required
extra credit supply. In this sense, the call target is less of a target
than a hope. Effectively, the only floor on the call rate now is zero.
Second, on reasons for the move, the BoJ cited the economy (indicators
are worsening), increased risk premiums for borrowers, and recent weak
equity prices. It added that the BoJ's job was to achieve price
stability, including prevention of a deflationary spiral. Moreover, it
added a separate category of supporting the financial markets with large
fund supply if needed. Finally, the BoJ said that there was "not a
moment to lose" in taking policy action for economy recovery and
financial system reconstruction. Note that the exchange rate was not
mentioned.
My sense of this memo is that the BoJ is giving a great deal of weight
to the financial system in its decision. The logic in the statement is
at odds with many statements from BoJ officials, who have said that
further interest rate cuts would not help the Japanese economy very much
if at all. Moreover, to cite weak equity prices today -- after the
Nikkei Dow has recovered to the high 14,000 range -- is not a convincing
reason to cut rates. Moreover, the statement that part of the reason for
the cut was the expansion of borrowing spreads seems odd. A rate cut
will not necessarily reduce those spreads. If interpreted as a desperate
move by the BoJ, the spreads might actually widen.
These changes of view on the economy and problems in the justification
for the cut suggest that financial system stability is the chief reason
for the change of policy. There could be information that the BoJ has
which (1) has not been released to the public, and (2) might have
triggered the action of the Policy Board. It is fruitless to speculate
on what this information might be. However, the suddenness of the action
and the immediate reaction of market participants who thought that
financial instability fears might have been the reason both support the
view that this action will likely be interpreted as taking the lead
ahead of some other announcement.
If this interpretation of the BoJ action is shared by investors, only a
limited rebound of the equity market is likely. The bond market is
likely to rally further, since JGBs are now being priced to a
significant extent from short-term rates. |
