Bank of Japan to the rescue with ‘thoroughly considered’ action | FT Alphaville

Bank of Japan to the rescue with ‘thoroughly considered’ action

As suggested on Friday, the Bank of Japan is getting ready for some “thoroughly considered” action in the wake of Friday’s devastating 8.9-magnitude earthquake and tsunami in Japan’s northeast.

On the weekend, it provided Y55bn ($670m) in funds to financial institutions in quake-affected areas, in a push to ensure banks in the worst-hit regions do not run out of cash by extending loans at favourable conditions.

But it also looks like the scene is being set in the currency markets, with Tokyo signalling its readiness to take on speculators who might dare to try to short the currency.

Not only that, prime minister Naoto Kan said on Sunday he plans a post-earthquake rebuilding package, a step that Bloomberg said may “worsen the challenge of curbing the world’s biggest public debt”, but which nevertheless would have a stimulatory effect.

Japan’s policy makers will need to compile a spending bill “over the medium to long-term” to deal with spending needs in the aftermath of the catastrophe, chief cabinet secretary Yukio Edano said on Sunday. For now, officials will use about Y200bn ($2.4bn) remaining from the budget for the fiscal year ending March 31, he added.

Meanwhile, the BoJ, not wanting to be outdone, had this to say on Sunday night, according to Reuters:

Bank of Japan Governor Masaaki Shirakawa said the central bank will provide huge amounts of liquidity to the banking system on Monday, reinforcing the bank’s determination to keep markets stable in the wake of the devastating earthquake that struck northeastern Japan.

“We will monitor market conditions and plan to provide markets with a lot of liquidity first thing tomorrow morning,” Shirakawa told reporters after attending a meeting of cabinet ministers for discussion on the economy on Sunday.

The BOJ is likely to provide 2 trillion to 3 trillion yen in funds through its market operations Monday morning, two to three times the normal amount, to soothe markets and keep short-term borrowing costs from spiking.

Shirakawa also said the central bank will “thoroughly consider” the economic impact of the earthquake when the board meets for a rate review on Monday.

Clearly, Japan’s regulators and bureaucrats have a feeling that FX wolves are lurking the markets. The Financial Services Agency said on Sunday it was “rigidly monitoring” markets to prevent any unfair transactions after the quake, adding that Tokyo financial markets will operate as normal on Monday. And just to drive the message home, economics minister Kaoru Yosano said the government would “fight decisively” against speculative moves and would not tolerate short-selling to take advantage of the earthquake, adds the FT.

The BOJ is set to keep interest rates on hold at a range of zero to 0.1 per cent at its rate review meeting on Monday, which it has decided to cut to just one day from the originally planned two-day meeting. Also, economists widely expect the BoJ to increase its current asset buying programme, with Takahide Kiuchi, economist at Nomura, estimating the Bank will increase the scheme from about Y5,000bn to between Y8,000bn and Y10,000bn.

Yosano, who is usually cautious about pressuring the BoJ for monetary easing, told a news conference he was “confident” that the central bank will take both traditional and non-traditional monetary policy steps when necessary, the report added.

One positive aspect to emerge from the unprecedented devastation wrought by the quake is a truce in the increasingly dire political gridlock. Ruling and opposition parties have called a truce to allow the government to focus on dealing with the aftermath of the quake. Maybe that could even allow the government to govern.

Related links:
In-depth report: Japan earthquake –
Earthquake damage, risk reduction – Lex
Earthquakes – from Japan to the States and back – FT Alphaville
Japan’s earthquake markets, then and now – FT Alphaville
Monetary policy in a time of natural disaster – FT Alphaville