Bank of Japan

Published: December 1 2009 11:25 | Last updated: December 1 2009 16:17

BoJ offers banks cheap loans

By Mure Dickie in Tokyo
Published: December 1 2009 09:11 | Last updated: December 1 2009 17:22
At a surprise policy board meeting on Tuesday, the Bank of Japan announced it would offer up to Y10,000bn ($115bn, 77bn, 70bn)
in cheap, three-month loans to commercial banks, an easing of monetary policy it said would firmly support the recovery of the
world's second-largest economy.
However, the attempt to boost financial sector liquidity disappointed markets and was dismissed by critics as little more than a
sideshow intended to head off calls from members of the new Democratic party-led government for more decisive action to curb
deflation and boost economic growth.
It all harks back to the days earlier this decade when the BoJ would respond to government pressure with some token and basically
meaningless change of policy and the politicians would be happy and go away for a bit, said Richard Jerram, chief economist at
Macquarie Research in Tokyo.
News of the meeting had sparked speculation the central bank might return to the kind of quantitative easing it pursued earlier this
decade when it committed itself to long-term low interest rates and made financial sector liquidity its policy target or at least step
up its purchases of government bonds.

At a press conference, Masaaki Shirakawa, BoJ governor, said the move to offer the three-month loans fixed at its 0.1 per cent policy
rate could be described as quantitative easing in a broad sense in that it was intended to prevent a shortage of liquidity among
financial institutions.
However, economists said the move would have limited significance, given little sign of such a shortage in Japan's financial system
and with commercial banks enjoying easy access to cheap funds. While the yen fell sharply against the dollar on news of the
unscheduled meeting, it regained much of its losses as speculators retreated from short positions taken on hopes for more aggressive
action, traders said.
Kiichi Murashima, managing director for economic analysis at Citigroup Global Markets Japan, said the BoJs decision not even to
raise its purchases of government bonds meant the meeting fell far short of market expectations.
However, leading members of the DPJ government welcomed the announcement. Yukio Hatoyama, prime minister, said the central
bank deserves praise and Hirohisa Fujii, finance minister, dubbed the lending facility appropriate. There was even grudging
approval from BoJ critic Shizuka Kamei, the outspoken financial sector minister who is head of the Peoples New party, a tiny DPJ
coalition partner. Taking action is better than not taking action, said Mr Kamei, who had previously accused the central bank of
talking in its sleep.
Still, analysts said, political pressure for more central bank action could revive if the yen continued to appreciate against the dollar and
deflation deepened, although there is little sign of the often fractious new government creating a united front that would threaten
central bank independence.
This is moral hazard in action. Japanese finance minister Hirohisa Fujii, having observed what a policy of quantitative easing can do
to a currency, is keen for Japan to follow the US and UK in cranking up the presses. Bank of Japan governor Masaaki Shirakawa has
also observed what QE can do to an economy: not a lot, in Japans case, in the early noughties. Weeks of briefings and counterbriefings culminated in an unscheduled monetary policy meeting of the BoJ on Tuesday.
What has emerged is a fudge. The meeting dissolved with a pledge to provide Y10,000bn ($115bn) of short-term funds to commercial
banks at a fixed interest rate. To the governor, this probably fits the definition of QE, or ryoteki kanwa, in the broadest sense. But it
was less aggressive than the other possible steps such as ramping up outright purchases of long-term government bonds, running at

about Y1,800bn a month, or promising to maintain low interest rates for longer than markets had priced in. Investors, noting a rare
invocation of Article 17 of the Bank of Japan Act to call an unscheduled meeting, might have expected something meatier.
Equities rallied a little, while the yen drooped, before paring some of its losses. Markets indifference emphasises that the BoJs new
regime, such as it is, is a half-way house. A more wholehearted implementation of QE cant be ruled out, with deflation tightening its
grip: prices excluding fresh food slid 2.2 percent in October from a year earlier, a near-record drop. Meanwhile, the impression of
warring institutions remains. As Barclays Capital notes, Japans best chance of persuading its G7 brethren to talk up the dollar is to
demonstrate that domestic authorities are on the same page. Tuesdays odd spectacle hardly helped.

Why were markets and economists underwhelmed by the decision to offer up to Y10,000bn in three-month low-interest loans to
banks?
Many observers thought that the surprise move to hold an unscheduled BoJ policy board meeting presaged more aggressive action
against falling prices. Some had speculated that the central bank would announce a return to quantitative easing, or QE.
But didnt Masaaki Shirakawa, BoJ governor, say the move could be seen as quantitative easing in the broad sense?
Yes, but it depends on what you mean by QE.
The term has often been used in the US and UK to mean central bank creation of money to buy assets. However, as practised by the
BoJ between 2001 to 2006, QE meant a commitment to holding interest rates at about zero and making the levels of reserves held by
commercial banks the target of monetary policy rather than the cost of overnight funds. Mr Shirakawa said the new lending was QE in
the sense that it was aimed at increasing the amount of liquidity in the financial system.
Would even a return to QE as previously practised solve Japans current economic problems?
Mr Shirakawa himself surely doesnt think so. He has said the increase in reserves that QE achieved last time helped maintain the
stability of the financial system, but did not do much to boost demand. A central problem was that while it was relatively easy to feed
commercial banks far more funds than they needed, the BoJ was unable to make them pass the surplus on into the wider economy. The

companies that banks wanted to lend to still did not want to borrow from the banks, and the banks still did not want to lend to the
companies that wanted to borrow. Later researchers struggled to find evidence of any boost to overall lending from QE.
So what else could the BoJ do to battle deflation and boost growth?
An obvious option is to step up its purchases of Japanese government bonds. The central bank already increased the pace of the
purchases from Y21,600bn a year in March from Y16,800bn.
But the BoJ has a self-imposed principle of not holding Japanese government bonds worth more than the total of banknotes in
circulation and sees the current pace as appropriate. The BoJ sees its JGB purchases as purely a monetary policy tool and Mr
Shirakawa has highlighted the risk that being seen to be monetising government debt could undermine trust in the bank. While
Tuesdays meeting suggests the BoJ is sensitive to calls for it to be bolder, it still prefers cautious.