The Bank of Japan’s step to provide short-term liquidity and expand an asset-purchase programme failed to contain investor panic today as the risk of nuclear radiation leaks north of Tokyo escalated.
Bank of Japan (BoJ) Governor Masaaki Shirakawa’s pledge yesterday to secure financial stability and prevent investors from becoming more risk averse was overwhelmed today, with the Topix index of stocks suffering its worst two-day drop since the 1987 crash. In the interbank lending market, overnight call loan rates traded between 0.08 per cent and 0.13 per cent, according to Ueda Yagi Tanshi Co, higher than the BoJ’s target of zero to 0.1 per cent.
“The market’s chaos won’t calm down unless the BoJ will take more bold actions,” said Susumu Kato, chief economist for Japan at Credit Agricole CIB and CLSA in Tokyo. “A further plunge in stocks will pressure the BoJ into additional easing.”
While the central bank said after its policy meeting yesterday that the economy remained on course to emerge from its fourth-quarter slump, risks to consumer confidence intensified with the government’s failure to contain a crisis at a nuclear power plant. Prime Minister Naoto Kan said in a televised address that the threat of further radiation leaks is rising.
Government reaction
The Topix slid 9.5 per cent at the close, following a 7.5 per cent drop yesterday. Japan’s currency rose 0.2 per cent to 81.46 per dollar. Bonds halted a two-day rally, sending 10-year yields 1.5 basis points higher to 1.215 per cent.
Government officials sought to play down the rout.
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Economic and Fiscal Policy Minister Kaoru Yosano told reporters markets will eventually stabilise, and there was no reason to suspend them. The slide in equities is due to uncertainty, and the economy is healthy, he said, adding that it was too early to comment on share-support measures. Chief Cabinet Secretary Yukio Edano said officials will closely monitor markets.
Shirakawa yesterday committed at a news conference in Tokyo to keep pumping cash as needed after unleashing a record ¥15 trillion ($183 billion) in one-day operations. The central bank added ¥8 trillion today. The bank yesterday also decided to double its asset-purchase programme to ¥10 trillion, an increase that’s about one-tenth the size of the US Federal Reserve’s Treasuries-buying effort.
‘Missing the chance’
“The Bank of Japan is missing the chance of doing something more aggressive,” said Masaaki Kanno, chief Japan economist at JPMorgan Chase & Co in Tokyo, who used to work at the central bank, said yesterday. “What the BoJ should do now is to anchor investors’ sentiment” with accelerated purchases in its programme, he said.
Should the equity market keep tumbling, Japan’s central bank may increase its purchases of risk assets under its asset-buying programme, said Norio Miyagawa, senior economist at Mizuho Securities Research and Consulting in Tokyo.
“If stocks continue to drop more and the yen gains further, it will probably have an adverse effect on corporate sentiment and household consumption,” Miyagawa said. “So the BoJ may need to take further action.”
Jim O’Neill, the London-based chairman of Goldman Sachs Asset Management, said the yen remains overvalued, giving the BoJ cause for more robust monetary stimulus.