Bank of Japan Readies 'Massive' Liquidity in Response to Quake
Bank of Japan Governor Masaaki Shirakawa. Photographer: Tomohiro Ohsumi/Bloomberg
March 11 (Bloomberg) -- Japanese Prime Minister Naoto Kan, U.S. President Barack Obama and Nouriel Roubini, founder of Roubini Global Economics, speak about the 8.9-magnitude earthquake that struck Japan and unleashed a seven-meter-high tsunami that killed hundreds of people as it engulfed towns on the northern coast. This report also contains comments from Francisco Blanch, global head of commodities research at Bank of America-Merrill Lynch; Scott Brown, chief economist at Raymond James & Associates Inc., and Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics. (Source: Bloomberg)
The Bank of Japan may today inject more short-term cash into the banking system after the nation’s most powerful earthquake on record, while keeping its asset- purchase plans unchanged as officials gauge the longer-term effect on the world’s third-largest economy.
Governor Masaaki Shirakawa told reporters late yesterday he’s ready to unleash “massive” liquidity starting this morning in Tokyo, as the BOJ seeks to assure financial stability.
Economists said officials will likely decide to keep longer-term credit programs at a total of 35 trillion yen ($428 billion) when they meet today at 1 p.m. in Tokyo. The bank’s main interest rate has already been cut to almost zero as policy makers last year sought to end the nation’s deflation.
“Monetary policy will be unchanged, but they will probably pledge to provide ample liquidity,” said Takehiro Sato, chief Japan economist at Morgan Stanley MUFG Securities Co. in Tokyo. Policy makers may also “establish an emergency lending facility to help financial institutions in Tohoku,” the northern region most damaged by the catastrophe, he said.
Shirakawa and his board could opt to accelerate asset purchases, including government bonds and exchange-traded funds, within the existing credit programs, particularly if the yen climbs and stocks tumble, said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co. in Tokyo, who used to work at the central bank.
Economic Damage
The economic hit from the March 11 quake will depend on how long it shuts down factories and the distribution of goods and services, with the potential meltdown at a nuclear power facility clouding the outlook. For now, the central bank is likely to ensure lenders have enough cash to settle transactions, and aim any additional steps at providing credit in the areas of northeastern Japan devastated by the temblor, analysts said.
Japan’s currency rose 1.4 percent to 81.84 per dollar March 11 amid prospects for Japanese investors to repatriate assets, bringing its gain in the past year to 10 percent. The government may order the BOJ to sell yen if it soars, Mansoor Mohi-uddin, head of global currency strategy at UBS AG in Singapore, wrote in a note. The Nikkei 225 (NKY) Stock Average fell 1.7 percent by the close, 14 minutes after the 8.9-magnitude shock at 2:46 p.m.
Spending Package
Prime Minister Naoto Kan is also preparing a fiscal response, deploying about 200 billion yen left over from the budget for the fiscal year ending March 31 and planning a supplementary budget. Finance Minister Yoshihiko Noda said it would take beyond the end of this month to compile the additional package.
Opposition leader Sadakazu Tanigaki told reporters in Tokyo yesterday he proposed to Kan a temporary tax to help fund the relief effort, and Chief Cabinet Secretary Yukio Edano said later that such a step cannot be ruled out.
The central bank set up a task force after the temblor, and pledged in a statement March 11 to ensure financial stability and said it will do everything it can to provide ample liquidity. The BOJ extended 55 billion yen to lenders over the past two days to ensure cash was on hand for withdrawals by survivors.
The money went to 13 financial institutions operating outside regular business hours in disaster-struck areas, the bank said in a statement yesterday, adding that it was checking on the scale of damage to lenders.
The quake struck hardest in Tohoku, the northern region of the main island of Honshu that accounts for about 8 percent of Japan’s gross domestic product.
Sony, Toyota
Companies from Sony Corp. to Toyota Motor Corp. halted production after the quake struck 2:46 p.m. local time 130 kilometers (81 miles) off the coast of Sendai, north of Tokyo. Nissan Motor Co. said 2,300 new vehicles were damaged by tsunami surges. Tokyo Electric Power Co. yesterday was battling to avoid a meltdown at its Fukushima nuclear plant, and warned it will today begin rolling, periodic blackouts of Tokyo.
Declines in stocks may shake consumer confidence, which slid to a 10-month low in December as the government started to unwind economic stimulus measures. The economy had contracted in the fourth quarter as consumer spending and exports slumped, a decline economists had said would be temporary as a rebound in global growth fuels overseas demand.
“The earthquake has increased the risk the economy won’t be able to emerge from its lull, which many believed would happen this quarter” said Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo. He added that the government is likely to spend about 5 trillion yen for recovery efforts.
Press Briefing
Policy makers may establish a lending program to help financial institutions in the Tohoku area, said Hiromichi Shirakawa, chief Japan economist at Credit Suisse in Tokyo and a former Bank of Japan official.
Today’s decision was originally scheduled for tomorrow following a two-day meeting; the BOJ said it cut short the gathering to accelerate its response. Shirakawa plans a press conference after the announcement.
“The BOJ is very likely to focus on cautious operations aimed at preventing any problems in fund transactions between financial institutions,” Goldman Sachs Group Inc. economists including Tokyo-based Chiwoong Lee wrote in a research note. “We also expect it to devise new measures in the context of its current comprehensive monetary policy to support the rebuilding of affected areas and buoy the entire Japanese economy based on continuing assessments of the impact.”
After Kobe
In the days following the 1995 Kobe earthquake, the BOJ boosted liquidity injections to the money market and pumped 500 billion yen in excess funds to restrain the uncollateralized overnight lending rate, which was around 2 percent. It lowered its benchmark official discount rate in April and September, bringing it to 0.5 percent, a record low at the time, as the economy deteriorated and the yen rose. The currency surged about 21 percent in the three months after the quake.
In the Kobe case, demand for cash in the money market surged because commercial lenders had to meet withdrawals from businesses and individuals who wanted cash on hand.
Lawmakers drafted a 2.7 trillion yen supplementary budget in May 1995 to help with reconstruction efforts in Kobe, where the disaster killed more than 6,000 people. The March 11 earthquake and the tsunami it produced might have killed more than 10,000, national broadcaster NHK reported, citing Miyagi prefecture police. The official toll reached 977, with 739 more missing and 1,683 injured as of late yesterday.
Fiscal Threats
“A large part of the reconstruction costs will probably have to be met by local authorities and ultimately by central government, which is already struggling to bring public debt under control,” said Julian Jessop, chief international economist at Capital Economics Ltd. in London. “The greater the social and economic damage, the larger the threat to the government’s ability and willingness to ward off a fiscal crisis.”
Noda said the nation’s growing debt load would not impede its rescue effort. Standard and Poor’s downgraded Japan’s credit rating to AA- in January and Moody’s Investors Service lowered its outlook on the nation’s Aa2 grade to negative from stable last month.
“We are going to do everything we can” Noda told reporters in Tokyo on March 11 after the quake. “The fiscal situation can’t be a constraint to addressing this natural disaster.”
Stepping up policy easing efforts may help accelerate the end of deflation in Japan, according to Edward Lincoln, a New York University professor who directs the school’s Center for Japan-U.S. Business and Economic Studies. Price pressures may already emerge as a result of a jump in demand for goods after the quake.
“If the Bank of Japan takes this opportunity to follow a somewhat more expansionary monetary policy, that would also underwrite a shift toward inflation rather than deflation,” said Lincoln, who was an adviser to then-U.S. Ambassador to Japan Walter Mondale in the Clinton administration. “There’s no guarantee.”
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