Japan announced steps to address several of its economic and financial problems on Friday when the Bank of Japan agreed to pump more money into the economy and one of the country's largest banks, under pressure from regulators, disclosed the full extent of its bad loan problems.
The decisions, incremental as they were, suggested that Japan's policymakers are more squarely confronting the ills that plague the economy. The steps also suggest that lawmakers are trying to assure investors they are doing everything they can to keep the current recovery from losing steam.
After a two-day meeting, the Bank of Japan's policy board raised the amount of money it could pump into the markets, to ¥32 trillion (US$294 billion) from ¥30 trillion, an effort to help the economy by dampening rising interest rates and the yen. A weaker yen could erase worries that Japan's recovery is in danger of stalling and help Prime Minister Junichiro Koizumi, who on Friday dissolved parliament and called for elections next month.
Koizumi has also pledged to clean up the nation's troubled banking system. In May, the government effectively nationalized the fifth-largest lender, Resona Holdings, whose capital was dangerously low. On Friday, the bank said it would probably lose ¥1.76 trillion (US$16 billion) in the half year ended Sept. 30, as it writes off more problem loans.
The loss is equal to about 90 percent of the emergency funds the government pumped into the bank earlier this year. Thanks to the government's bailout and the bank's aggressive write-offs, Resona can more quickly return to health.
With the government's finances stretched, though, much of the burden of reviving the economy has fallen to the Bank of Japan, which, in theory, has limitless resources to print money. Financial authorities have intervened in the foreign exchange markets to increase exports by attempting to reverse the yen's nearly 10 percent rise against the dollar since August.
That direct strategy has angered Japan's major trading partners, who are under pressure to weaken their own currencies and placate manufacturers in their countries. By flooding the economy with extra money, the Bank of Japan's governor, Toshihiko Fukui, may weaken the yen and remove the need to intervene directly in the financial markets, where authorities have spent an estimated ¥13 trillion buying dollars this year.
"This was the Bank of Japan's alibi to stop the rise of the yen," said Yasunari Ueno, chief market economist at Mizuho Securities, about the bank's actions. "Fukui is trying to head off pressure from politicians and the Finance Ministry to do more to weaken the yen."
The bank's action, which was not entirely unexpected, comes a week ahead of a visit to Japan by US President George W. Bush. When he visits Tokyo, starting Oct. 17, Bush is likely to reiterate his opposition to Japan's intervention in foreign exchange markets to weaken the yen and bolster its exports.
In addition to pumping more money into the economy, the central bank's policy board also said that it would keep pushing short-term interest rates to zero until consumer prices either stopped falling or started rising. The renewed commitment was also designed to allay fears that the Bank of Japan was halfhearted about addressing the yen's rise and the deflation it creates.
"Financial markets do not view the BOJ's claim to be fighting deflation as credible," said Richard Jerram, an economist at ING Securities in Tokyo. "With the yen breaking through ¥110 to the dollar, so far it is not having much success."
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