Bank of Japan Expands Asset Purchases

Bank of Japan Expands Asset Purchases to Support Economy

By BETTINA WASSENER

HONG KONG — The Japanese central bank on Monday raced to shield the country’s economy and plunging financial markets from the impact of the devastating earthquake and tsunami by pumping cash into the financial system and easing monetary policy further through an expansion of asset purchases.

At the end of a policy meeting — truncated and moved forward to facilitate fast action after Friday’s quake — the Bank of Japan said that it would double the size of an existing program to purchase government and corporate bonds and other financial assets to 10 trillion yen, or $121.7 billion

“The damage of the earthquake has been geographically widespread,” the central bank said in a statement accompanying its decision. Production was likely to decline, and company and consumer sentiment could deteriorate in the aftermath of the massive quake, the Bank of Japan said.

It added that its asset purchase extension was done “with a view to pre-empting a deterioration in business sentiment and an increase in risk aversion in financial markets from adversely affecting economic activity.”

With interest rates in Japan already near zero, the central bank cannot lower rates further. It does, however, have the ability to lubricate the financial wheels of the economy by other measures: Earlier in the day, the Bank of Japan had offered to pump a record 15 trillion yen, or $183 billion, of extra liquidity into the banking system in a bid to help stabilize markets.

The steps were “very appropriate in terms of dealing with the short-term impact” of the disaster, said Stephen Schwartz, an economist with the Spanish bank BBVA in Hong Kong. “It will take a long time until we can really quantify the fallout on the overall economy, but what is clear is that they are going to have to set aside fiscal consolidation plans for the moment.”

The massive damage caused by the earthquake and the resulting tsunami, the fate of several quake-stricken nuclear reactors and rolling power blackouts that began Monday generated a huge amount of uncertainty and nervousness in the markets.

The Nikkei 225 index plunged 6.2 percent to close at 9,620.49 points, its lowest level since November. Elsewhere in Asia and in Europe, stocks were generally flat or down slightly.

Numerous Japanese companies — among them Fujitsu, Toyota and Sony — were forced to halt production at all or some of their sites in the wake of the quake, and industrial, manufacturing and financial stocks were among the biggest losers on the stock market.

Mitsubishi Motors down 11.8 percent, Nissan by 9.5 percent and Toyota by 7.9 percent. Sony slumped 9.2 percent, Canon dropped 5.9 percent and Panasonic by 8.1 percent. Toshiba and Hitachi both plunged more than 16 percent.

The country’s main banks also slumped badly: Mizuho Financial Group by 10.5 percent, Mitsubishi UFJ Group by 7.2 percent and SMFG by 6.4 percent.

Construction companies, by contrast, soared on expectations of the huge reconstruction that will be needed in the quake-stricken areas.

Hazama Corp. and Kumagai Gumi, for example, jumped more than 40 percent, and Kajima Corp., one of the biggest in the sector, rose 22.2 percent. Many others saw gains of well over 10 percent.

“Much of the damage will plainly come in the form of lost property and infrastructure, with insurance companies and re-insurance companies shouldering most of the burden. Government borrowing is sure to rise,” economists at DBS in Singapore said in a note on Monday. Economists at Credit Suisse in Tokyo projected that the total economic losses of the quake could amount to as much as 15 trillion yen.

The costs of rebuilding and cleanup will put additional pressure on government finances in a country that is already highly indebted, further tying the hands of policy makers who have been struggling to revive an economy bogged down by deflation. The quake struck just as the economy was starting to register growth again, and has raised fears that the tentative recovery will at least be delayed.

The Japanese yen, meanwhile, was volatile on Monday, first strengthening against the dollar and then weakening after the Bank of Japan injected liquidity into the money markets. It traded at 82.09 yen by late afternoon in Tokyo, compared to 81.84 in New York late Friday.

Compared to where it was before the quake, however, the yen has risen, as Japanese corporations and insurers repatriated cash to help pay for rebuilding — and analysts said it could rise even more. This would add to the pain felt by Japanese exporters, as a strong yen makes Japanese goods more expensive overseas.

“The strong yen bias could be enhanced by the negative effect on the Japanese economy, reduced tolerance for risk and the repatriation of funds in the wake of the earthquake,” strategists at Nomura said in a note Monday.

Elsewhere in the region, investor reaction was relatively muted. The Taiex in Taiwan dropped 0.6 percent, and the key index in Australia fell 0.4 percent. The Straits Times index in Singapore slipped 0.3 percent.

In South Korea, the Kospi reversed earlier losses to close 0.8 percent higher. The Hang Seng index in Hong Kong edged up 0.4 percent, and in India, the Sensex rallied 1.5 percent.

In early European trading, the DAX in Germany was down about 1 percent, while the FTSE 100 in Britain and the CAC 40 in Paris were up slightly.