Symbolic moves by the Bank of Japan
JAPAN’S economy has long been sickly. It now also has to contend with a stronger yen, thanks in part to loose monetary policy elsewhere in the rich world. That alone gave the Bank of Japan (BoJ) reason to act on October 5th. So too did criticism that it has not done enough to spur the economy, which has inspired Japanese politicians to suggest legislation to weaken the central bank’s independence.
Whatever its motivation, the BoJ this week took three modest but symbolic steps. First, it lowered its policy rate from 0.1% to a range between zero and 0.1%. That signals to the market, and to disenchanted politicians, that the BoJ cares. Second, the BoJ stated that it would maintain its virtual zero-rate policy until there was “medium- to long-term price stability”. Until deflationary Japan sees consumer prices rise by between 0% and 2% a year (with an unofficial aim of 1%), the long-standing near-zero policy rate will remain.
Third, the central bank said that it would consider establishing a programme to buy public- and private-sector assets from banks—including commercial paper, corporate bonds and perhaps even exchange-traded funds and Japan real-estate investment trusts. Since the financial crisis Japan has continued to accept financial instruments as collateral in order to pump money into the system, but has not bought the assets. The effect would be to restart the policy of quantitative easing that Japan used to claw out of its banking crisis between 2001 and 2006. The initial amount under consideration is about ¥5 trillion ($60 billion), ¥3.5 trillion of which is for public-sector debt. That is on top of a sum of ¥30 trillion already budgeted for BoJ loans to banks.
The market had expected some form of easing but had not imagined a whittling of interest rates, however symbolic. The Nikkei 225 Stock Average hit a two-month high on October 6th and bonds rose sharply. From a political standpoint, too, the moves were a success. The finance minister, Yoshihiko Noda, said he expected the actions to weaken the yen and improve the economy. “Very timely,” gushed Banri Kaieda, the economics minister.
Whether the BoJ’s actions will have any lasting impact on the economy is another matter. The change in the policy rate does not mean much in practice: it merely reinforces the message that low rates are here to stay for a while. The asset-purchase programme is as yet too small to matter. An expected round of fresh quantitative easing by America’s Federal Reserve later this year will put more upward pressure on the yen, which on October 7th reached a 15-year high against the dollar, about where it was before last month’s currency intervention. Still, the BoJ seems willing to respond to a worsening economic climate and to political heat. The psychological boost that represents should not be discounted.
Whatever its motivation, the BoJ this week took three modest but symbolic steps. First, it lowered its policy rate from 0.1% to a range between zero and 0.1%. That signals to the market, and to disenchanted politicians, that the BoJ cares. Second, the BoJ stated that it would maintain its virtual zero-rate policy until there was “medium- to long-term price stability”. Until deflationary Japan sees consumer prices rise by between 0% and 2% a year (with an unofficial aim of 1%), the long-standing near-zero policy rate will remain.
Third, the central bank said that it would consider establishing a programme to buy public- and private-sector assets from banks—including commercial paper, corporate bonds and perhaps even exchange-traded funds and Japan real-estate investment trusts. Since the financial crisis Japan has continued to accept financial instruments as collateral in order to pump money into the system, but has not bought the assets. The effect would be to restart the policy of quantitative easing that Japan used to claw out of its banking crisis between 2001 and 2006. The initial amount under consideration is about ¥5 trillion ($60 billion), ¥3.5 trillion of which is for public-sector debt. That is on top of a sum of ¥30 trillion already budgeted for BoJ loans to banks.
The market had expected some form of easing but had not imagined a whittling of interest rates, however symbolic. The Nikkei 225 Stock Average hit a two-month high on October 6th and bonds rose sharply. From a political standpoint, too, the moves were a success. The finance minister, Yoshihiko Noda, said he expected the actions to weaken the yen and improve the economy. “Very timely,” gushed Banri Kaieda, the economics minister.
Whether the BoJ’s actions will have any lasting impact on the economy is another matter. The change in the policy rate does not mean much in practice: it merely reinforces the message that low rates are here to stay for a while. The asset-purchase programme is as yet too small to matter. An expected round of fresh quantitative easing by America’s Federal Reserve later this year will put more upward pressure on the yen, which on October 7th reached a 15-year high against the dollar, about where it was before last month’s currency intervention. Still, the BoJ seems willing to respond to a worsening economic climate and to political heat. The psychological boost that represents should not be discounted.
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