Bank of Japan boosts stimulus for sagging economy, markets unimpressed
The Bank of Japan boosted its monetary stimulus for the second month in a row on Tuesday in response to intense political pressure for action and mounting evidence that the world's third-largest economy was on the cusp of recession.
In a well-flagged move, the central bank topped up its asset buying and lending program, its main monetary easing tool, by 11 trillion yen ($138 billion) to 91 trillion, broadly in line with what markets had factored in.
As a result the yen firmed and benchmark 10-year bonds erased earlier gains driven by some speculation that the BOJ might choose to surprise with more aggressive action.
It was the first time since 2003 that the conservative BOJ has eased policy for two months in a row. In another rare move, the central bank issued a joint statement with the government pledging their combined efforts to pull Japan out of deflation.
Stepping further into unorthodox territory, the BOJ also unveiled a plan to supply banks with unlimited amount of cheap, long-term funds under a new scheme initially seen sized around 15 trillion yen.
But neither the BOJ's stronger language nor its new scheme managed to impress analysts, who expect pressure for more monetary easing to persist.
"The problem is not banks' ability to lend. The problem is a lack of demand for loans due to deflation and a high exchange rate," said Masayuki Kichikawa, chief Japan economist at Bank of America Merrill Lynch in Tokyo. "The markets will continue to expect more from the BOJ."
BOJ Governor Masaaki Shirakawa acknowledged that worsening signs in overseas economies were the key trigger for the latest easing, which followed a similar-sized stimulus worth just over 2 percent of Japan's GDP, in September.
"We were aware of the global slowdown in September. But developments since then have shown that the slowdown was in fact deepening," he told a news conference.
Exports slumped and factory output suffered its biggest fall since last year's earthquake as Europe's debt crisis and slowing Chinese growth hurt business mood, heightening calls from politicians for further monetary stimulus to avert recession.
Japan has also suffered from the economic fallout from a territorial row with Beijing which has led companies, including carmakers Honda <7267.T> and Toyota <7203.T>, to slash profit forecasts and rethink investment plans in their top market.
Adding to the pressure on the central bank was its pledge made in February to achieve 1 percent price growth, and its admission that it will need more time to get there.
As widely expected, the BOJ cut its growth forecasts in a semi-annual review and projected that consumer inflation will only reach 0.8 percent in the year to March 2015 - which still far exceeds private-sector estimates of near-zero growth.
SHIRAKAWA STRIKES BACK
Board members Takahide Kiuchi and Takehiro Sato, among those who feel the BOJ can do more to beat deflation, argued for a more strongly worded commitment to achieving 1 percent inflation. The requests were turned down, but may keep alive debate within the central bank for making a stronger commitment to its ultra-easy monetary policy.
Saddled with the developed world's biggest debt burden, the government has been looking to the BOJ to end the vicious circle of price declines that prompt businesses and consumers put off spending and investment.
In a rare move underscoring the political heat, Economics Minister Seiji Maehara attended the BOJ meeting on Tuesday to make a direct call for further easing.
That resulted in the joint statement between the BOJ and the government, in which both sides called on each other to take measures to beat deflation and boost Japan's growth potential.
"The BOJ will continue with powerful monetary easing to aim for 1 percent inflation," the central bank said in the statement with the government, the first to be issued since a revised BOJ law guaranteeing its independence took effect in 1998.
Shirakawa, however, said the joint statement -- signed by the finance and economic ministers, also puts the onus on the government to implement structural reforms and deregulation to make Japan a more attractive place to invest.
"The fact we put out this statement together has a grave meaning for the government, which made clear it will vigorously pursue steps to boost Japan's growth potential," he said.
Many analysts agree with the BOJ that simply flooding cash to markets already awash with excess fund will have little direct effect of stimulating the economy.
Bank lending rose just 1 percent in the year to September even as the BOJ pumped more than 60 trillion yen so far via its asset buying and lending program, as companies remain reluctant to borrow for investment due to the murky outlook. ($1 = 79.8150 Japanese yen)
(Additional reporting by Tetsushi Kajimoto and Kaori Kaneko; Writing by Tomasz Janowski; Editing by Simon Cameron-Moore)