The Bank of Japan (BoJ) poured a record amount of cash into the financial system and doubled the size of its asset-purchase plan to shield the economy from the effects of the nation’s strongest earthquake on record.
The central bank pumped ¥15 trillion ($183 billion) into money markets today to assure financial stability amid a plunge in stocks and surge in credit risk. Governor Masaaki Shirakawa and his board also enlarged a programme buying assets from government bonds to exchange-traded funds to ¥10 trillion.
Policy makers said they were concerned corporate and household sentiment will worsen, with production set to decline in the aftermath of the temblor and an ensuing tsunami. The March 11 catastrophe killed an estimated number of more than 10,000 people, shut down factories, prompted rolling power cuts and sparked the risk of a meltdown at a nuclear power plant.
“The disaster will push down gross domestic product in the short run, and the BoJ wants to mitigate the deflationary impact through liquidity injections,” said Tomo Kinoshita, a Hong Kong-based economist at Nomura Holdings.
Japan’s currency, which initially climbed against the dollar then retreated in the wake of the central bank’s cash injections, stayed lower after the policy decision. It traded at 81.95 as of 6.04 pm in Tokyo. Stocks stayed lower, with the Nikkei 225 Stock Average closing down 6.2 per cent minutes following the announcement.
Shut plants
Manufacturers from Sony to Toyota closed plants today, with Sony, Japan’s biggest exporter of consumer electronics, halting operation at 10 factories and two research centres. Toyota, the world’s largest automaker, said it closed all 12 factories in Japan through March 16.
The BoJ chief told reporters cash injections will continue as needed and it is “crucial” the central bank stabilises money markets, an indication it will take further steps in coming days.
The BoJ will increase buying of government debt in the fund by ¥500 billion and boost purchases of short-term government securities by ¥1 trillion. Corporate debt will rise by ¥1.5 trillion and it will also take on an additional ¥450 billion in Exchange-Traded Funds (ETFs) and ¥50 billion in Real Estate Investment Trusts.
Today’s steps go beyond the forecast of analysts including Takehiro Sato, chief Japan economist at Morgan Stanley MUFG Securities, who anticipated that the bank would limit its response to short-term liquidity provision.
Pre-empting deterioration
The asset-purchase fund was increased in size “with a view to preempting a deterioration in business sentiment and an increase in risk aversion in financial markets from adversely affecting economic activity,” the BoJ policy board said in its statement. Since the earthquake “the Bank of Japan has been trying to gauge its effects on financial markets and financial institutions’ business operations,” it said.
“Buying riskier assets may have a positive impact on the risk-taking stance of market participants,” Shirakawa said at a news conference following the board meeting today.
