It might signify the evolution of what some have already dubbed ‘QE3, Japanese-style’ into something more limited but focused on disaster relief and reconstruction. The effects, however, may be felt in markets around the world.
The Bank of Japan decided at its two-day policy meeting that ended on Thursday not to ease monetary policy further in response to the March 11 earthquake, tsunami and nuclear crisis. But the central bank said it would provide Y1,000bn ($11.7bn) in loans for Japan’s damaged north east region, on top of a previous Y5,000bn increase in asset purchases.
From the Bank’s policy statement:
In addition to such measures, the Bank judged it necessary to introduce a funds-supplying operation that provides financial institutions in disaster areas with longer-term funds in order to support their initial response efforts to meet the future demand for funds for restoration and rebuilding… It also judged it appropriate to broaden the range of eligible collateral for money market operations with a view to securing sufficient financing capacity of financial institutions in disaster areas.
Indeed, analysts had not expected any further substantial easing after the BoJ’s unprecedented speed in making available$ 265bn to banks and doubling its asset-purchase programme to Y10,000bn in the immediate aftermath of the March 11 quake. As Barry Ritholtz at BigPicture observed, with those actions, the BoJ “spewed the equivalent of their own QE2 – in just 3 days”.
Now, although faced with deteriorating business sentiment, the central bank has signalled an end – for now – to further broad monetary stimulus. The move disappointed would-be carry traders, halting the yen’s recent slide, and sending it up at 8am BST 0.2 per cent against the dollar to Y85.26 and by 0.4 per cent to Y121.95 against the euro.
As the FT’s global markets commentator Jamie Chisholm remarked, such yen moves were slight, but “may be imbued with hefty market relevance”. Indeed, he notes, some investors have bought into the idea that the weakening yen and its ultra-low borrowing rates were the source of a renewed burst of carry-trade based speculation. And any reversal of the strategy “could impact a swathe of hot assets”.
As for the BoJ’s much-vaunted programme of asset purchases – “vaunted” because the scheme marked the first time for the BoJ to wade into (relatively) unorthodox (for the central bank, that is) investments such as ETFs and real estate investment trusts – the jury is out. FT Alphaville has already delved into the mixed results of the BoJ’s ETF buying; and as Lex noted on Thursday, “there’s no compelling evidence that the purchases work”.
Perhaps the most revealing point about the BoJ’s decision-making in coming months emerged not from Tokyo but New York, where analyst Marc Chandler recently attended a private briefing of analysts at the BoJ’s rep office.
In a post on CreditWritedowns, Chandler tells how the deputy director of the stats office at the BoJ’s New York branch explained that Japanese economic data for the next few months are likely to be skewed as a result of the March 11 disasters and would not provide a “clean read” (Chandler’s words) on the real state of the economy.
The official also played down the most recent quarterly Tankan reports, released last week, suggesting sample distortions (see also our recent post, “The hidden slide of Japanese business sentiment”). In any event, the BoJ suggests the June Tankan will be given greater weighting.
Of course, as Edward Chancellor noted in a recent column for FTfm, the BoJ could always “return to its curmudgeonly ways and remove excess liquidity”. Nevertheless, he concluded, political, monetary, and supply-side developments over the past month all point to a shift in Japan’s deflation dynamics. And if that shift turns out to be decisive, “some good could emerge from Japan’s national tragedy”.
We couldn’t agree more.
Related links:
Japan – to buy or not to buy? – FT Alphaville
Five reasons the yen will strengthen - FT Alphaville
Carry trade = quantitative easing – FT Alphaville
Yen moves - FT Alphaville