Wednesday, December 2, 2009

Bank Of Japan Offers Low-Interest Loans

. Wednesday, December 2, 2009

By stockOzone team

The Bank of Japan decided at an unscheduled policy meeting on Tuesday to offer up to Y10,000bn in three-month low-interest loans to commercial banks, a move it said would "firmly support" the recovery of the world's second largest economy.

The move, which will add to liquidity available to the financial system, came after pressure from politicians in the new Democratic party-led government for more aggressive action to support growth and combat deflation.

However, the offered loans, which will be fixed at the BoJ's meagre 0.1% policy rate, appear unlikely to have major macro-economic significance, given that commercial banks already have easy access to cheap funds.

Hirohisa Fujii, finance minister, had said ahead of the hastily called meeting of the BoJ policy board members that while the government respected the central bank's independence, he thought a return to a policy of "quantitative easing" could have a "positive" effect on the economy.

But the BoJ's announcement made no mention of any return to the kind of quantitative easing policies it pursued earlier this decade, when it committed to long-term low interest rates and made financial sector liquidity its policy target.

"The Bank has judged that it is most effective at present to encourage a further decline in longer-term interest rates in the money market through provision of ample longer-term funds at an extremely low interest rate," the BoJ said.

Masaaki Shirakawa, BoJ governor, has made clear his doubts about the ability of quantitative easing as previously practised by the bank to boost growth and has stressed instead the key role that broader macro-economic policies must play to combat price falls.

In a nod to critics who say it is too relaxed about the return of the deflation that dogged Japan earlier this decade, the BoJ on Tuesday insisted it recognised that it was a "critical challenge for Japan's economy to overcome deflation."

However, it showed no willingness to change its central monetary policy, promising merely to "continue to do its utmost as central bank" to address falling prices.

Japan's headline consumer price index, which excludes fresh food, fell 2.2% last month from a year earlier, less than declines recorded in the previous two months because of stabilising energy prices. But deflation in so-called "core-core" consumer prices, which exclude energy, rose to 1.1% from 1% in September.

The yen fell 1.4% against the dollar to Y87.53 on Tuesday morning in Tokyo after local reports of the unscheduled BoJ meeting, but the Japanese currency rose after the announcement to trade at Y87.04 by late afternoon.

Currency traders said they had been expecting the BoJ to announce quantitative easing measures. One currency trader in Tokyo said speculators took short positions on the yen on talk of more aggressive policy, but bought the currency back once the results of the policy board meeting were announced.

Disclosure: Author does not own any of the stocks discussed here.

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