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To: Les H who wrote (155794)	3/14/2002 9:42:33 AM
From: Les H	Read Replies (2) \| Respond to of 436258

ANALYSIS-Bank of Japan entering danger zone Thursday March 14, 1:59 AM EST By Kazunori Takada TOKYO, March 14 (Reuters) - The Bank of Japan is approaching the endgame. Some say it is already out of moves. After driving interest rates to zero a year ago and unveiling radical policy steps to pump increasing amounts of money into the banking system to ward off deflation, the central bank still faces an economy stuck in its worst slump in half a century. And analysts say the BOJ has just about run out of options. "There is only one remaining policy that it can take without getting a slap on the wrist in return," said Soichi Okuda, senior economist at Aozora Bank. "But it would not have much effect." That last step is a further hike in its monthly buying of Japanese government bonds (JGBs) to 1.2 trillion yen ($9.3 billion) from a current one trillion yen -- effectively printing more money under its unorthodox "quantitative easing" policy. Bolder moves, including heftier increases in its monthly buying spree in bonds, could jeopordise the bank's credibility or risk a dangerous loss of confidence in Japan's currency. "The 1.2 trillion is the market consensus for the BOJ's limit," said Makoto Yamashita, strategist at UFJ Capital Markets. In the past four months, BOJ Governor Masaru Hayami has inched closer to the limit, announcing in late February a hike in purchases of government bonds from 800 billion yen, a figure that swelled from 600 billion yen a month in December. "I think the BOJ has reached its limit and its trust as a central bank could be lost any time," said Koji Shimamoto, chief strategist at BNP Paribas in Tokyo. "The only reason it is still holding is that the market has expectations for structural reform," he said. Hayami has been urging Prime Minister Junichiro Koizumi to get on with structural reforms and a speedy disposal of banks' bad loans to allow his monetary policy steps to filter through to the economy. ALREADY CROSSED THE LINE? The central bank decided last March to keep a strict limit on outright buying of JGBs below the total amount of banknotes in circulation, with an eye on keeping inflation under control. As of February, the BOJ held about 50 trillion yen ($386 billion) of government bonds, while the outstanding balance of banknotes issued stood at about 65 trillion yen. Factoring in annual growth in banknote issuance of about eight percent, the central bank can purchase about 1.2 trillion in JGBs each month without hitting its limit, analysts say. However, some said the BOJ had already crossed that line. Shimamoto said the 65 trillion yen of banknotes circulating in February was effectively exaggerated by the government's end to a guarantee on bank deposits, which contributed to the biggest rise in Japan's money supply in two years in February. Demand for cash has increased as many individuals and companies shift money away from term deposits ahead of the end of a blanket guarantee on such deposits at the end of this month. "Considering that the recent growth in money printing is due to a short-term factor of the government's end to guarantees on bank deposits, I think one trillion is the limit," Shimamoto said. INFLATION POLICY COULD BACKFIRE But most analysts expect only a limited impact on government bond yields if the BOJ raises its monthly JGB purchases to 1.2 trillion yen. The yield on benchmark 10-year JGBs slid to a low of 1.020 percent after the BOJ's first quantitative-easing policy was announced in March 2001. But it soon rose back to 1.502 percent. Since then, despite several increases in JGB buying, long-term yields have remained relatively high, recently marking 1.570 percent on February 7. Doing away with the limit on JGB purchases, however, could unleash a bear market, they added, stoking fears the central bank was adopting a controversial inflation targetting policy that the BOJ itself has long opposed. "It would be a 180 degree change in the BOJ's stance and signal that the BOJ will pursue an inflation policy," said Aozora Bank's Okuda. Cabinet ministers and politicians have raised the idea of an inflation target to reverse three years of falling consumer prices that have been blamed for crippling the banking system. Some want the BOJ to buy a wider variety of assets in its operations to artificially achieve certain levels of inflation. "Most senior-level officials (at the BOJ) find their identity in fighting inflation. Such a policy would amount to losing such an identity," said Seiji Shiraishi, chief market economist at Daiwa Securities SMBC. Still, a number of experts say the BOJ has succumbed to political pressure in the past and could do so again if pushed too hard by a government intent on reversing deflation without tackling the root cause of falling prices -- excess capacity. "I feel that the BOJ may be forced to do it," Aozora's Okuda said. Also, most analysts doubt inflation-targeting would pull Japan from the clutches of recession, although it might briefly push up stock prices. "I think the effect would be temporary," said Takuji Aida, fixed income strategist at Merrill Lynch. "After about two years, I think negative effects would start start showing." ($1=129)