Ramsey,
I guess the law of unintended consequences still has some
vitality.
Regards,
Tundra
BOJ to Examine Results of Last Week's Policy Change
Tokyo, Sept. 23 (Bloomberg) -- Bank of Japan policymakers will
probably leave interest rates unchanged at a meeting Thursday.
Instead, they are likely to examine the consequences of a Sept.
9 rate cut, their first policy change in three years, analysts said.
Two weeks ago, the central bank unexpectedly cut its target rate
for overnight loans between banks, equivalent to the U.S. federal
funds rate, to 0.25 percent from slightly below the 0.5 percent
discount rate.
The central bank also pledged to flood the banking system with
cash to ensure banks can meet their funding needs and to prevent
the economy from sinking into a deflationary spiral.
The cut ''has exacerbated a credit crunch for weak banks in the money
market,'' said Masatoshi Tsukakoshi, a money market analyst at
Standard & Poor's MMS International.
The central bank's action lowered the return on overnight lending
to banks so much, that investors are basing their decisions less on
returns and increasingly on creditworthiness, he said.
That means banks seen as relatively risky are having trouble
borrowing in the short-term money market, even if they offer higher
rates.
''Since the rate cut, investors are paying more attention to the
health of borrowers,'' said Shoji Kitta, president of Totan Research,
an arm of Japanese money market brokerage Tokyo Tanshi. ''In fact,
investors are grouping banks into 'good banks,' 'relatively good
banks' and 'bad banks,' and even 'relatively good banks' have trouble
borrowing sufficient money.''
Irony
That's ironic for the Bank of Japan, which had intended to prevent
such a crunch through the policy change. That goal was expressed by
Bank of Japan Governor Masaru Hayami, following the rate cut.
The central bank is ''ready to provide plenty of funds to maintain
the stability of financial markets, if necessary, regardless of the
level of the interbank overnight loan rate,'' Hayami said.
The bank's determination hasn't helped all banks.
Since the Sept. 9 rate cut, the weighed average of the interbank
overnight loan rate has hovered between 0.23 percent and 0.28 percent,
in line with the 0.25 percent target.
Yet, only three to four banks can borrow overnight cash at rates
around 0.25 percent, while some banks are forced to pay as much as
1 percent, Totan Research's Kitta said.
''If the current situation continues, some banks may end up unable
to borrow cash needed for daily settlements and go bankrupt,'' Kitta
said.
In November, Japan's short-term capital market experienced a crisis
following a chain of financial institution failures, including
Yamaichi Securities Co., the nation's fourth-largest brokerage, and
Hokkaido Takushoku Bank Ltd., a national lender. Wary of defaults,
investors rushed to slash or stop lending to many Japanese banks.
That drove up short-term interest rates. The interbank overnight
call rate jumped to 0.64 percent in late November, above the 0.5
percent target. Then, as now, some banks had to offer 1 percent for
overnight cash.
The rise fueled rumors about banking failures, and about a dozen banks experienced runs on deposits. To end the crunch, the central bank infused as much as 20 trillion yen in cash -- about a quarter of the national budget -- to the banking system.
The bank may have to repeat the action, Kitta said.
Deadlock
A delay in the passage of government legislation aimed at restoring
health to the banking industry is contributing to investors'
reluctance to lend to banks, and darkening the economic outlook.
Debate on the legislation has stalled as the ruling party and
opposition parties disagree on whether to use taxpayer money to bail
out Long-Term Credit Bank of Japan Ltd., one of the countries largest
and sickest banks.
The ruling Liberal Democratic Party says an agreement reached last
Friday allows the use of taxpayer money to prop up the bank.
The opposition parties say they agreed the government would take
control of the bank and eventually close it down.
The delay in the banking plan has pushed up the so-called '
'Japan premium,'' the extra interest rates Japanese banks are
forced to pay to borrow money overseas.
''The credit crunch in the banking system can never be resolved by
a change in the Bank of Japan's monetary policy alone,'' said Susumu
Takahashi, chief economist at the Japan Research Institute, a private
organization funded in part by the Sumitomo group of companies.
''It can be mended only when the government establishes measures to
clean up bad loans in the financial system.''
The premium on three-month eurodollar deposits today stood at
0.5 percentage point, little changed from 0.51 percent a day before
the central bank's rate cut.
BOJ Governor Hayami said difficulty borrowing overseas has forced
Japanese banks to borrow in yen at home, swap the yen into foreign
currencies and send the funds to overseas branches. That boosts
demand for cash in the domestic money market, further pushing up
short-term interest rates.
Hayami said the central bank has other options to lower interest
rates and increase funds in the banking system, including a reduction
in the amount commercial banks are required to keep on reserve at the
central bank.
The bank may also consider increasing the types of securities it buys
from financial institutions, Hayami said.
''There is a chance that the Bank of Japan's policy board will decide
to ease policy further at their meetings in October,'' said
Tsukakoshi at Standard & Poor's MMS International. ''Even though
the board members know a next step would have no more than a
psychological impact, they may conclude they have to act again.''
Though, just ''two weeks after an interest rate cut, the policy
board is unlikely to move for further policy change at Thursday's
meeting,'' he said.
|
