By Hiroko Tabushi
Masaaki Shirakawa, governor of the Bank of Japan, bows to start his annual press conference at the bank’s headquarters in Tokyo on Wednesday (Toshifumi Kitamura/Agence France-Presse — Getty Images)
TOKYO — In a bid to shore up a deflation-plagued economy, Japan’s central bank eased monetary policy further on Wednesday by boosting a bank-loan program, setting the world’s second-largest economy on a divergent path from other industrialized nations.
Central banks around the world have in recent weeks mulled rolling back stimulus steps put in place during the global economic crisis, gradually shrinking excess liquidity in their banking systems. The U.S. Federal Reserve said Tuesday it will let a mortgage-security purchase program expire at the end of March.
But in Japan — where prices have remained sluggish amid a lackluster recovery from its worst recession since World War II — the government has urged monetary authorities to further stimulate the economy by flooding the banking sector with cash.
Japan is also leaning on monetary policy because its public debt load, the highest among industrialized countries, makes it reluctant to spend more money on public works projects and other government stimulus programs.
In a 5-2 vote at a policy meeting on Wednesday, the Bank of Japan’s board decided to double a bank-loan program aimed at boosting liquidity in the Japanese economy to 20 trillion yen ($222 billion). The fixed-rate loans are available for three months.
The board voted unanimously to keep the bank’s main policy rate on hold at 0.1 percent.
“The latest step is additional monetary easing. We are employing the available tools to contribute to improving the economy and overcoming deflation, Gov. Masaaki Shirakawa said at a press conference.
But Mr. Shirakawa struck a note of caution, saying the latest step alone “would not clear up the cloud hanging over the Japanese economy.
One way central banks have spurred economic activity has been to lower interest rates, which makes it cheaper for businesses and consumers to borrow money to invest or spend, and less attractive for them to save.
But with interest rates already close to zero, Japan is being forced to resort to other measures.
Japan pursued a zero-interest rate policy from 2001 to 2006, when it gradually started raising rates, hitting 0.5 percent in early 2007.
But in late 2008, the central bank again started to slash rates as Japan’s economy was hit by the effects of the global economic crisis.
With Wednesday’s move, Japan’s financial institutions will be able to borrow a combined total of 20 trillion yen for three months at a fixed rate of 0.1 percent. Still this most recent action could be offset by the end of a separate credit facility that provides unlimited loans, backed by collateral, to commercial banks.
“The BOJ’s decision to expand the lending program may signal that Japan still can’t exit from the emergency mode and heads in the opposite direction from the global trend,” Mari Iwashita, chief market economist at Nikko Cordial Securities Inc. in Tokyo, told Bloomberg News.
Moreover, Japan’s efforts may have little impact because banks are struggling to boost credit growth amid a weak economy, despite ample liquidity — a situation economists call a “liquidity trap”.
Japan is not expected to start tightening monetary policy soon. Even as Japan’s economy shows signs of recovery — its economy has grown for three straight quarters — prices continue to fall. Consumer prices dipped for an 11th month in January, while bank lending has fallen for three straight months amid sluggish demand for credit.
A major problem facing Japan is deflation, or a general fall in prices due to a lack of demand. Falling prices makes consumers even more reluctant to spend, because any purchase is likely to be cheaper in the future.
Deflation also depresses investment by corporations, because falling prices make it difficult to predict returns and make debts harder to pay off.
Finance Minister Naoto Kan has called on the central bank to do more to fight deflation. This week, he said he hoped Japan’s economy would beat deflation this year.
Mr. Kan applauded the central bank on Wednesday, saying the move showed it is “stepping up efforts to fight deflation”.
“It is not hard to imagine that the government’s strong hope that Japan can beat deflation is behind the monetary loosening,” Takehiro Sato, a Tokyo-based economist at Morgan Stanley, wrote in a report.
“If the government and Bank of Japan can present a unified front in fighting deflation, they might be able to send a positive message to markets,” Mr. Sato said.
But other analysts remain skeptical.
The central bank has “made it clear that it does not believe that it has the tools to bring deflation to an early end,” Richard Jerram, Japan economist for Macquarie, said in a report. “As a result, it seems prudent to expect another extended period of price declines”.
Gov. Shirakawa warned that beating deflation would be a long, arduous task.
“It will take a long time for Japan to overcome deflation. We have to calmly accept that it will take time for improvements,” Mr. Shirakawa said. “ We will be persistent in our monetary policy,” he said.
The New York Times
