Japan's Central Bank to Open the Cash Tap
Clay Chandler and Akiko Kashiwagi Washington Post Service Wednesday, August 15, 2001
'Risks to the Economy' Are Invoked In About-Face on Monetary Policy
TOKYO The Bank of Japan promised Tuesday to pump additional credit into Japan's ailing economy, following calls from politicians, economists and international agencies to do more to pull the country out of a decadelong economic slump.
.
The decision, reached at a meeting of the central bank's policy board, buoyed financial markets, with stocks rising nearly 4 percent in Tokyo. The bank had already allowed interest rates to drift near zero and, in an usual policy shift, vowed March 19 to leave them there for as long as necessary to arrest the long slide in consumer prices.
.
Bank officials argued previously that new credit injections were unlikely to speed recovery of the economy while Japanese banks remained weak and reluctant to make new loans. Bank officials also had warned that, in the long run, a looser monetary policy might do more harm than good if it removed incentives for corporations to shed unprofitable business lines.
.
But the Bank of Japan governor, Masaru Hayami, said Tuesday that the decision had been prompted by concerns that the health of the world economy was deteriorating more rapidly than expected. "The global economy is falling at a stronger pace than we had previously thought," Mr. Hayami said.
.
The decision calls for the central bank to flood the credit markets with extra cash by increasing its target for the amount commercial banks must keep in reserve at the central bank to ¥6 trillion ($49 billion) from ¥5 trillion and by raising the central bank's monthly purchases of long-term government bonds to ¥600 billion from the current ¥400 billion.
.
The steps were along the lines of those suggested by the International Monetary Fund in an unusual recommendation over the weekend.
.
In an apparent departure from past comments, in which he has rejected the notion that the central bank should take stock prices into consideration in formulating monetary policy, Mr. Hayami made explicit reference to recent declines in Japanese equity markets.
.
"At home, share prices have been falling," he said. "Bank shares have been falling, amid downgradings of their credit ratings, and investors are worried. We cannot help but think that downside risks to the economy are becoming a reality."
.
He also expressed concern about the challenges that will confront the Japanese financial system in September, when many banks and businesses will be required for the first time to report assets and liabilities according to a stricter standard, the so-called mark-to-market rules under which securities must be accounted for at their market price.
.
Whether or not Japanese stock prices were the object of the central bank's move Tuesday, they rebounded sharply. The Nikkei average of 225 stocks, which dropped Monday to a 16-year low, rose 3.84 percent to close at 11,917.95. Bond prices and the yen rose, too.
.
Economists joined investors in hailing the decision. But many expressed skepticism that a new credit infusion from the central bank would do much to bolster growth and arrest a damaging downward spiral in prices.
.
The problem, many contended, is not that Japan's banks have too little money to lend but that, in a weakening economy, banks see few promising lending opportunities. Borrowers, meanwhile, have been reluctant to assume new liabilities while prospects of being able to repay them remain uncertain. Lending by Japan's major banks has fallen steadily for the past three years.
.
There was widespread debate in the markets about whether the central bank's policy move was driven by politics rather than economics. The bank, which was granted formal legal autonomy from the Finance Ministry only three years ago, has been heavily criticized by business leaders and conservative legislators in the governing Liberal Democratic Party for its refusal to ease credit more aggressively.
.
In recent weeks, a group of influential Liberal Democratic legislators have pushed legislation that would take back some of the bank's independence by granting the government power to force monetary policy targets and delay implementation of central bank decisions.
.
Robert Feldman, chief economist at Morgan Stanley in Tokyo, interpreted the bank's move as an effort to deflect such efforts by showing a bit of "goodwill." But he warned that the tactic could easily backfire.
.
"My fear is that this has only emboldened the opponents of the reform process, and put the focus back on the Bank of Japan," he said.
.
Ron Bevacqua, economist at Commerz Securities in Tokyo, offered a blunter assessment.
.
"The Bank of Japan caved in," he said. "What this shows is that the tough guy attitude was only a veneer."
.
Some investors said the bank's move was welcome, if only to shore up consumer confidence.
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< < Back to Start of Article 'Risks to the Economy' Are Invoked In About-Face on Monetary Policy
TOKYO The Bank of Japan promised Tuesday to pump additional credit into Japan's ailing economy, following calls from politicians, economists and international agencies to do more to pull the country out of a decadelong economic slump.
.
The decision, reached at a meeting of the central bank's policy board, buoyed financial markets, with stocks rising nearly 4 percent in Tokyo. The bank had already allowed interest rates to drift near zero and, in an usual policy shift, vowed March 19 to leave them there for as long as necessary to arrest the long slide in consumer prices.
.
Bank officials argued previously that new credit injections were unlikely to speed recovery of the economy while Japanese banks remained weak and reluctant to make new loans. Bank officials also had warned that, in the long run, a looser monetary policy might do more harm than good if it removed incentives for corporations to shed unprofitable business lines.
.
But the Bank of Japan governor, Masaru Hayami, said Tuesday that the decision had been prompted by concerns that the health of the world economy was deteriorating more rapidly than expected. "The global economy is falling at a stronger pace than we had previously thought," Mr. Hayami said.
.
The decision calls for the central bank to flood the credit markets with extra cash by increasing its target for the amount commercial banks must keep in reserve at the central bank to ¥6 trillion ($49 billion) from ¥5 trillion and by raising the central bank's monthly purchases of long-term government bonds to ¥600 billion from the current ¥400 billion.
.
The steps were along the lines of those suggested by the International Monetary Fund in an unusual recommendation over the weekend.
.
In an apparent departure from past comments, in which he has rejected the notion that the central bank should take stock prices into consideration in formulating monetary policy, Mr. Hayami made explicit reference to recent declines in Japanese equity markets.
.
"At home, share prices have been falling," he said. "Bank shares have been falling, amid downgradings of their credit ratings, and investors are worried. We cannot help but think that downside risks to the economy are becoming a reality."
.
He also expressed concern about the challenges that will confront the Japanese financial system in September, when many banks and businesses will be required for the first time to report assets and liabilities according to a stricter standard, the so-called mark-to-market rules under which securities must be accounted for at their market price.
.
Whether or not Japanese stock prices were the object of the central bank's move Tuesday, they rebounded sharply. The Nikkei average of 225 stocks, which dropped Monday to a 16-year low, rose 3.84 percent to close at 11,917.95. Bond prices and the yen rose, too.
.
Economists joined investors in hailing the decision. But many expressed skepticism that a new credit infusion from the central bank would do much to bolster growth and arrest a damaging downward spiral in prices.
.
The problem, many contended, is not that Japan's banks have too little money to lend but that, in a weakening economy, banks see few promising lending opportunities. Borrowers, meanwhile, have been reluctant to assume new liabilities while prospects of being able to repay them remain uncertain. Lending by Japan's major banks has fallen steadily for the past three years.
.
There was widespread debate in the markets about whether the central bank's policy move was driven by politics rather than economics. The bank, which was granted formal legal autonomy from the Finance Ministry only three years ago, has been heavily criticized by business leaders and conservative legislators in the governing Liberal Democratic Party for its refusal to ease credit more aggressively.
.
In recent weeks, a group of influential Liberal Democratic legislators have pushed legislation that would take back some of the bank's independence by granting the government power to force monetary policy targets and delay implementation of central bank decisions.
.
Robert Feldman, chief economist at Morgan Stanley in Tokyo, interpreted the bank's move as an effort to deflect such efforts by showing a bit of "goodwill." But he warned that the tactic could easily backfire.
.
"My fear is that this has only emboldened the opponents of the reform process, and put the focus back on the Bank of Japan," he said.
.
Ron Bevacqua, economist at Commerz Securities in Tokyo, offered a blunter assessment.
.
"The Bank of Japan caved in," he said. "What this shows is that the tough guy attitude was only a veneer."
.
Some investors said the bank's move was welcome, if only to shore up consumer confidence. 'Risks to the Economy' Are Invoked In About-Face on Monetary Policy
TOKYO The Bank of Japan promised Tuesday to pump additional credit into Japan's ailing economy, following calls from politicians, economists and international agencies to do more to pull the country out of a decadelong economic slump.
.
The decision, reached at a meeting of the central bank's policy board, buoyed financial markets, with stocks rising nearly 4 percent in Tokyo. The bank had already allowed interest rates to drift near zero and, in an usual policy shift, vowed March 19 to leave them there for as long as necessary to arrest the long slide in consumer prices.
.
Bank officials argued previously that new credit injections were unlikely to speed recovery of the economy while Japanese banks remained weak and reluctant to make new loans. Bank officials also had warned that, in the long run, a looser monetary policy might do more harm than good if it removed incentives for corporations to shed unprofitable business lines.
.
But the Bank of Japan governor, Masaru Hayami, said Tuesday that the decision had been prompted by concerns that the health of the world economy was deteriorating more rapidly than expected. "The global economy is falling at a stronger pace than we had previously thought," Mr. Hayami said.
.
The decision calls for the central bank to flood the credit markets with extra cash by increasing its target for the amount commercial banks must keep in reserve at the central bank to ¥6 trillion ($49 billion) from ¥5 trillion and by raising the central bank's monthly purchases of long-term government bonds to ¥600 billion from the current ¥400 billion.
.
The steps were along the lines of those suggested by the International Monetary Fund in an unusual recommendation over the weekend.
.
In an apparent departure from past comments, in which he has rejected the notion that the central bank should take stock prices into consideration in formulating monetary policy, Mr. Hayami made explicit reference to recent declines in Japanese equity markets.
.
"At home, share prices have been falling," he said. "Bank shares have been falling, amid downgradings of their credit ratings, and investors are worried. We cannot help but think that downside risks to the economy are becoming a reality."
.
He also expressed concern about the challenges that will confront the Japanese financial system in September, when many banks and businesses will be required for the first time to report assets and liabilities according to a stricter standard, the so-called mark-to-market rules under which securities must be accounted for at their market price.
.
Whether or not Japanese stock prices were the object of the central bank's move Tuesday, they rebounded sharply. The Nikkei average of 225 stocks, which dropped Monday to a 16-year low, rose 3.84 percent to close at 11,917.95. Bond prices and the yen rose, too.
.
Economists joined investors in hailing the decision. But many expressed skepticism that a new credit infusion from the central bank would do much to bolster growth and arrest a damaging downward spiral in prices.
.
The problem, many contended, is not that Japan's banks have too little money to lend but that, in a weakening economy, banks see few promising lending opportunities. Borrowers, meanwhile, have been reluctant to assume new liabilities while prospects of being able to repay them remain uncertain. Lending by Japan's major banks has fallen steadily for the past three years.
.
There was widespread debate in the markets about whether the central bank's policy move was driven by politics rather than economics. The bank, which was granted formal legal autonomy from the Finance Ministry only three years ago, has been heavily criticized by business leaders and conservative legislators in the governing Liberal Democratic Party for its refusal to ease credit more aggressively.
.
In recent weeks, a group of influential Liberal Democratic legislators have pushed legislation that would take back some of the bank's independence by granting the government power to force monetary policy targets and delay implementation of central bank decisions.
.
Robert Feldman, chief economist at Morgan Stanley in Tokyo, interpreted the bank's move as an effort to deflect such efforts by showing a bit of "goodwill." But he warned that the tactic could easily backfire.
.
"My fear is that this has only emboldened the opponents of the reform process, and put the focus back on the Bank of Japan," he said.
.
Ron Bevacqua, economist at Commerz Securities in Tokyo, offered a blunter assessment.
.
"The Bank of Japan caved in," he said. "What this shows is that the tough guy attitude was only a veneer."
.
Some investors said the bank's move was welcome, if only to shore up consumer confidence. 'Risks to the Economy' Are Invoked In About-Face on Monetary Policy
TOKYO The Bank of Japan promised Tuesday to pump additional credit into Japan's ailing economy, following calls from politicians, economists and international agencies to do more to pull the country out of a decadelong economic slump.
.
The decision, reached at a meeting of the central bank's policy board, buoyed financial markets, with stocks rising nearly 4 percent in Tokyo. The bank had already allowed interest rates to drift near zero and, in an usual policy shift, vowed March 19 to leave them there for as long as necessary to arrest the long slide in consumer prices.
.
Bank officials argued previously that new credit injections were unlikely to speed recovery of the economy while Japanese banks remained weak and reluctant to make new loans. Bank officials also had warned that, in the long run, a looser monetary policy might do more harm than good if it removed incentives for corporations to shed unprofitable business lines.
.
But the Bank of Japan governor, Masaru Hayami, said Tuesday that the decision had been prompted by concerns that the health of the world economy was deteriorating more rapidly than expected. "The global economy is falling at a stronger pace than we had previously thought," Mr. Hayami said.
.
The decision calls for the central bank to flood the credit markets with extra cash by increasing its target for the amount commercial banks must keep in reserve at the central bank to ¥6 trillion ($49 billion) from ¥5 trillion and by raising the central bank's monthly purchases of long-term government bonds to ¥600 billion from the current ¥400 billion. |
