The Bank of Japan said it will “steadily” provide liquidity, as a climb in short-term borrowing costs posed a risk to the nation’s expansion.
“The bank will steadily purchase various financial assets and provide longer-term funds” so that “the effects of comprehensive monetary easing spread,” it said in the statement in Tokyo today. It left the size of its asset-buying fund and credit programs at 5 trillion yen ($60 billion) and 30 trillion yen respectively and kept the key interest rate unchanged.
The BOJ’s purchases of real-estate investment trusts and exchange traded funds have bolstered stock prices, a sign the stimulus has supported sentiment even as global growth slows. At the same time, an increase in bond yields suggests that higher interest rates may threaten the economic outlook and compel the BOJ to do more.
“Short-term rates are too high,” said Shuichi Obata, senior economist at Nomura Securities Co. in Tokyo. “The BOJ should provide ample funds through money market operations to rein in gains in the short-term rates.”
Governor Masaaki Shirakawa and his policy board held the benchmark rate between zero percent and 0.1 percent in a unanimous vote as expected by all 16 economists surveyed by Bloomberg News.
Yields on Japan’s two-year government bonds and benchmark 10-year bonds have climbed this quarter, setting the stage for the biggest quarterly increases since the April-June of 2008. The yield on 10-year government debt fell to 1.175 percent today and two-year debt yielded around 0.21 percent, according to Bloomberg Data.
Economic Contraction
An increase in borrowing costs may depress business confidence and discourage consumers and companies from investing and spending. The economy is already set to contract this quarter because of fading stimulus measures and slowing export growth. The central bank said it wants to lower the yields of debt with maturities of around 2 years when it unveiled its policy measures in October.
Shirakawa said on Nov. 29 that Japan’s yields have been driven up by higher U.S. bond yields and board member Yoshihisa Morimoto this month said Japan’s long-term rates haven’t reached a level that is harmful to the economy. Both said the bank is ready to expand the fund should the economy’s outlook deteriorate significantly and more stimulus becomes necessary.
Contain Yields
“If the BOJ wants to provide an additional boost to the economy it needs to contain increases in short-term yields,” said Naka Matsuzawa, chief strategist at Nomura Securities Co. in Tokyo. “There’s no doubt that could start to erode the effect of stimulus measures it already has in place.”
Matsuzawa said the BOJ could provide additional liquidity through its daily money market operations to ease an increase in yields rather than increasing the size of the purchase fund.
The central bank kept its economic assessment while noting that production has declined and business sentiment has weakened because of a slowdown in exports and fading policy effects of policy stimulus.
“Continuous yield increases at a time when the economy is stagnating could be harmful, and the BOJ should explicitly signal its commitment” to contain gains, said Jun Ishii, chief fixed-income strategist at Mitsubishi
UFJ Morgan Stanley.
Shirakawa will speak at a press conference at 3:30 p.m. today to address the bank’s policy and recent economy and financial markets.
Yen Weakens
Japan’s currency has weakened 0.8 percent against the dollar since the BOJ adopted the package on Oct. 5. The Japanese currency was traded at 83.70 as of 1 p.m. in Tokyo. A stable yen may reduce pressure on the central bank to add policy stimulus, according to analyst Seiji Shiraishi.
“A major reason for the BOJ to adopt its policies was the yen’s rapid appreciation,” said Shiraishi, chief economist at HSBC Securities. “Given that the Japanese currency has been weakening somewhat recently, there are few incentives for the bank to forcefully push down yields now” using policy tools, he said.
The central bank started buying exchange-traded funds and real estate investment trusts last week. It commenced purchases of corporate bonds rated at least BBB early this month, on top of government debt purchases.
The extra yield investors demand to hold such five-year BBB-rated company debt rather than government notes of similar maturity has narrowed since the BOJ introduced its asset-buying program. The Tokyo Stock Exchange REIT Index has advanced 10.8 percent during the same period. The Nikkei 225 Exchange-Traded Fund, which tracks the performance of the benchmark stock index, has risen 7.3 percent, the same amount as gains in the Nikkei 225 Stock Average.
Selling Debt
The central bank’s asset purchase plan has encouraged companies to sell debt to investors. Nippon Sheet Glass Co., which acquired Pilkington Group Ltd. in 2006, sold BBB rated bonds this month and raised 24 billion yen from its first public sale of bonds since May 2008. Topy Industries Ltd., a Tokyo- based maker of steel products, also issued debt of the same grade this month, its first sales of bonds in three years, according to data compiled by Bloomberg.
“The BOJ’s initiative has been inducing investors’ buying of ETFs and JREIT, driving the rallies,” said Masaaki Kanno, a former BOJ official and now chief Japan economist at JPMorgan Chase & Co. in Tokyo. Even so, “the central bank needs to constantly send strong signals that it intends to beat deflation.”
Consumer Prices
Consumer prices excluding fresh food fell 0.6 percent in October, the 20th consecutive month of decline. BOJ policy makers have pledged to maintain the near-zero interest rate policy until the bank can forecast stable price gains, which board members consider to be a rise of around 1 percent.
The economy will shrink 1.9 percent this quarter as Prime Minister Naoto Kan’s stimulus spending fades, the government- affiliated Economic Planning Association said Dec. 8, citing analysts’ forecasts. Government measures to spur encourage consumers to purchase cars and electronics helped the economy expand an annualized 4.5 percent in the third quarter.
Kan’s ability to push through more stimulus is limited by his falling approval ratings, an opposition-controlled upper house and a swelling government debt burden. His approval ratings slid to 21 percent in a survey conducted by the Asahi newspaper on Dec. 11 and 12, compared with 27 percent in a November poll.
“The BOJ will probably consider increasing the fund should stocks fall and the yen resume gains ahead of the fiscal year end” on March 31, said Mari Iwashita, chief market economist at Nikko Cordial Securities in Tokyo. Buying more government debt is the most likely option while the bank may increase ETFs should stock prices slump, she said.
To contact the reporters on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net
To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net
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