The Bank of Japan (BOJ) yesterday poured a record amount of cash into the financial system and doubled the size of its asset-purchase plan to shield the economy from the effects of the nation’s strongest earthquake on record.
The central bank pumped ¥15 trillion (US$183 billion) into money markets to assure financial stability amid a plunge in stocks and surge in credit risk. Bank of Japan Governor Masaaki Shirakawa and his board also increased the program that buys assets from government bonds to exchange-traded funds (ETFs) to ¥10 trillion.
Policymakers said they were concerned corporate and household sentiment would worsen, with production set to decline in the aftermath of the temblor and an ensuing tsunami. Friday’s catastrophe killed an estimated more than 10,000 people, shut down factories, prompted rolling power cuts and sparked the risk of a meltdown at a nuclear power plant.
“The BOJ’s showing its resolve to do all it can to stabilize financial markets,” said Yasunari Ueno, chief market economist at Mizuho Securities Co in Tokyo.
The Japanese currency, which initially climbed against the dollar then retreated in the wake of the central bank’s cash injections, stayed lower after the policy decision. The Nikkei 225 Stock Average closed down 6.2 percent minutes following the announcement.
The BOJ will increase buying of government debt in the fund by ¥500 billion and boost purchases of short-term government securities by ¥1 trillion. Corporate debt will rise by ¥1.5 trillion and it will also take on an additional ¥450 billion in ETFs and ¥50 billion in real estate investment trusts, its statement said.
Yesterday’s steps go beyond the forecast of analysts, including Takehiro Sato, chief Japan economist at Morgan Stanley MUFG Securities Co, who anticipated that the bank would limit its response to short-term liquidity provision.
The asset-purchase fund was increased in size “with a view to preempting a deterioration in business sentiment and an increase in risk aversion in financial markets from adversely affecting economic activity,” the BOJ policy board said in its statement.
Since the earthquake “the Bank of Japan has been trying to gauge its effects on financial markets and financial institutions’ business operations,” it said.
Officials kept the benchmark interest rate at a range of zero to 0.1 percent and maintained their monthly target for regular government-bond purchases, which are separate from the asset-purchase program, at ¥1.8 trillion. Borrowing costs were already cut near zero last year as officials sought to revive growth and end deflation.
“We are providing as much funds as needed to dispel anxiety in financial markets,” Kazushige Kamiyama, an official in charge of the central bank’s money-market operations, said before the policy announcement. “We will continue to add ample funds to stabilize financial markets.”
Besides the ¥15 trillion in emergency funds deployed in the central bank’s biggest one-day operation, the Bank of Japan offered to buy ¥3 trillion of government bonds from lenders in repurchase agreements starting tomorrow.
Before the quake, Japan’s economy was showing signs of a revival, after shrinking an annualized 1.3 percent in the fourth quarter of last year.
With Japanese Prime Minister Naoto Kan planning a supplemental budget to pay for reconstruction, Moody’s Investors Service said yesterday that Japan may “at some point” reach a fiscal “tipping point” if investors lose confidence in the soundness of public finances and demand a risk premium on government bonds.
Japan’s economy will recover and a fiscal crisis is not “imminent,” Tom Byrne, a senior vice president at Moody’s Investors Service, also said in an e-mailed note yesterday.
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