Japan----Leading the US? Interesting Article
Bank of Japan Will Buy
Asset-Backed Securities
Unconventional Measure Aims to Boost
Economy That Barely Grew in 1st Quarter
By MARTIN FACKLER and GREP IP
Staff Reporters of THE WALL STREET JOURNAL
With its cupboard of traditional deflation-fighting tools almost bare, the Bank of Japan stepped into unexplored policy territory by announcing it will buy junk-grade corporate debt in an attempt to jump-start economic growth.
The move -- a first by a modern central bank -- could signal that the Bank of Japan's new governor, Toshihiko Fukui, is more willing than his predecessor to take radical steps to reinflate the world's second-largest economy. Mr. Fukui's performance is being watched, particularly in the U.S. where Federal Reserve officials are alert to risks of Japan-style deflation.
With interest rates near zero, the Bank of Japan has exhausted most conventional monetary tools of sparking demand. The announcement reflects the Bank of Japan's frustration that money it is making available to private banks, essentially free, is just piling up and not getting lent out.
The decision, which followed a two-day meeting of the monetary-policy board, will let the bank broaden its market operations by buying as much as ¥one trillion ($8.49 billion) of securities backed by loans or receivables of small companies. These securities, which could have credit ratings as low as "double-B," a "junk" rating that is one notch below investment grade, would be bought from banks, which could use the money to make new loans.
Some economists said the move will have little economic effect, because the market for securities backed by small company assets is tiny, and the amount the bank is planning to purchase is minuscule in a $4 trillion economy.
The Bank of Japan said it is trying to get money flowing again to smaller borrowers, who are often the first to get cut off by banks looking to reduce risky loans. It has blamed the failure of conventional monetary policy on banks' mountain of bad loans, which they say has clogged the financial system by making banks wary of lending to all but the safest borrowers.
The failure of near-zero interest rates to spark demand in Japan is in part because it has experienced deflation since 1999, which means the real, or price-adjusted, cost of borrowing is still positive and thus a disincentive to borrow. The Fed has studied Japan's experience to prevent a repeat in the U.S., where underlying inflation is close to 1%. Fed officials consider deflation unlikely. But with their target for the federal funds rate, charged on overnight loans between banks, down to 1.25% they are studying alternative tools should that rate drop close to zero without sparking recovery. They have focused on strategies that are already expressly within the Fed's legal authority, which rules out buying stocks, corporate bonds, bank loans, mortgages or credit-card receivables.
Their most commonly cited alternative is to force down long-term rates directly by buying Treasury bonds. Still, Fed Vice Chairman Roger Ferguson, in a speech to the Japan Society in New York Wednesday, noted potential problems. If bond investors don't believe the federal funds rate would stay at zero for a long time, Mr. Ferguson said the Fed might then have to buy massive quantities of Treasurys to pull down Treasury yields, and still fail to bring down the more important rates paid by private borrowers.
Mr. Ferguson said the Fed could convince investors it would hold the federal funds rate at zero for a long time by adding more reserves to the banking system. It could verbally commit to hold rates at zero for a set period or until a particular inflation rate is achieved, and then sell interest-rate options or execute forward interest-rate agreements that would saddle the Fed with steep losses if it reneged on its commitment.
While these "actions are not simple to execute or without downside risk," Mr. Ferguson predicted they would work. In contrast to when the Bank of Japan began its unconventional strategies, he said U.S. long-term rates are still well above zero, its banks are able and willing to lend, corporate-balance sheets are in better shape and the demand for credit is stronger, reflecting better profit opportunities.
Fed Governor Ben Bernanke in a speech in Tokyo last month suggested the Bank of Japan could spur demand by targeting the actual level of prices, a step beyond targeting the common strategy of targeting the inflation rate, so that if a basket of goods and services cost $100 or higher in 1998 and now cost $95 because of deflation, the Bank of Japan would promise to return its price to $100. Thus, each year of deflation forces the Bank of Japan to work harder to reach its target. Mr. Bernanke said that would help end the deflationary psychology of Japanese consumers and ease the burden on debtors.
Revised GDP Data
Separately, Japan revised gross domestic product data Wednesday, showing that its economy grew in the first three months of 2003, but the revisions also showed that key pillars of support weren't as firm as initially indicated.
The data released by the Cabinet Office showed the economy expanded 0.1% in real terms in January-March from the previous quarter, at an annualized rate of 0.6%, compared with a flat performance in the preliminary data released May 16.
The revised headline figure surprised some economists who had expected a contraction in the period due to weaker private consumption and business investment. Although both consumption and capital spending were actually revised downward, a large revision to private inventories boosted overall GDP. |
