BOJ to pump an additional US$130 bil. into economy

Wednesday, February 15, 2012
By Harumi Ozawa AFP

TOKYO -- The Bank of Japan (BOJ) said Tuesday that it will pump US$130 billion more into its ailing economy, the latest push to combat stubborn deflation as domestic and global uncertainty intensifies.

However, analysts warned that was unlikely to be enough to kick start the sluggish economy, a day after data showed it had slowed much faster than expected in the final three months of 2011.

The central bank said it would increase its asset purchase program by 10 trillion yen (US$130 billion) to about 65 trillion yen, in a surprise move that softened the yen and boosted the stock market.

“When central banks in Europe and the United States are taking more easing policies, the Bank of Japan appeared to be left behind,” said Tsuyoshi Ueno, senior economist at NLI Research Institute.

“It was nonetheless a surprising move, which makes us wonder 'why now?'” he said, suggesting the bank may have come under political pressure to fight deflation, which has stalked the Japanese economy for more than a decade.

“The (gross domestic product) figures were weaker than expected, and politicians are now discussing raising the sales tax,” he said. “Tackling deflation is a dire necessity.”

Later, BOJ Governor Masaaki Shirakawa denied the decision was the result of political pressure, telling reporters: “If the independence of a central bank is not respected, it will eventually have a negative effect through rises in long-term interest rates.”

The BOJ move will see the bank buy financial assets such as government bonds and commercial paper from private financial institutions, effectively providing more money to banks who can then lend to cash-strapped firms.

The central bank has been forced to resort to the unconventional measure as its ability to free up money has been limited since interest rates were cut to zero to 0.1 percent at the end of 2008 during the global financial crisis.

The BOJ also for the first time set a target level for inflation, saying that it had a price stability “goal” of 2 percent in the medium- to long-term and 1 percent for the time being.

The rate is currently zero percent.

“The bank will pursue powerful monetary easing by conducting its virtually zero interest rate policy and by implementing the Asset Purchase Program mainly through the purchase of financial assets,” the BOJ said in a statement.

“The outlook for Japan's economy continues to entail high uncertainty regarding the prospects and outcomes of the European debt problem, the supply and demand balance of electricity and the effects of the yen's appreciation,” it said.

“The goal of overcoming deflation will be achieved through such efforts to strengthen growth potential and support from the financial side.”

Deflation continues to pose a threat to Japan's recovery as a fall in general prices cuts into corporate profits, leading firms to slash jobs and put off capital investment that generates growth.

It also hurts demand because it encourages consumers to put off purchases.

The BOJ action strengthened the dollar against the Japanese unit, with the greenback buying 77.99 yen, up from 77.59 before the announcement, while the benchmark Nikkei index reversed earlier losses to end in positive territory.

But Hideo Kumano, chief economist at Dai-Ichi Life Research Institute, warned the central bank's action would still not be enough to support the economy.

“On the face of it, you cannot say it is a dramatic change if it is only about expanding it by 10 trillion yen,” Kumano said. “It needs another something to become more effective.”

On Monday, Japan said the economy shrank a worse-than-expected 2.3 percent on an annualized basis in the final three months of 2011, owing to the strong yen, falling overseas demand and record flooding in Thailand that hit production.

The world's number three economy shrank 0.6 percent quarter-on-quarter, the Cabinet Office said, and 0.9 percent through 2011. It grew 4.4 percent in 2010.

The contraction was more severe than the annualized 1.6-percent drop forecast by economists surveyed by Dow Jones Newswires.

It also sharply contrasted with a revised 7-percent annualized growth for the July-September period, which was in part boosted by reconstruction after the March 11 earthquake and tsunami.

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