Japan Moves to Defeat Deflation

Moves fall short of what's needed say economists.

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Japan LanternsThe Bank of Japan has embarked on an innovative approach to quantitative easing but it still falls short of what’s needed to end that country’s struggle with deflation or repair damage from the yen’s climb to a 15- year high against the dollar. Bloomberg reports below:

(Bloomberg) The Bank of Japan said it will buy Japanese real estate investment trusts with credit ratings of AA or higher, providing more details on how it will invest money in a new fund that aims to stimulate demand and defeat deflation.

Japan’s central bank will also purchase exchange-traded funds that track the Nikkei 225 Stock Average and the Topix index, the BOJ said in a statement after its policy board decided today in Tokyo to leave unchanged its key interest rate and cash provision targets. It brought forward the two-day gathering by more than a week so it could complete details about the 5 trillion yen ($62 billion) fund unveiled last month that will also buy government and corporate debt.

Coming two days after the Federal Reserve’s decision to pour $600 billion into the market to support growth, the BOJ’s inaction on policy underscores its relief that the U.S. move didn’t lead to a yen surge. Should the currency’s rise resume and threaten exporters in coming months, Governor Masaaki Shirakawa may be forced to boost the asset fund, said economist Takehiro Sato.

“The size of the fund is becoming a sort of new policy target for the BOJ’s monetary policy easing,” said Sato, chief Japan economist at Morgan Stanley MUFG Securities Co. in Tokyo. “The governor himself has already flagged his readiness to expand the fund.”

Unanimous Decision

The BOJ policy board voted unanimously to keep the overnight call rate between zero and 0.1 percent. It also maintained the sizes of its 5 trillion-yen fund and a 30 trillion yen-program to encourage bank lending.

All 16 economists surveyed by Bloomberg News after the Fed decision said they didn’t expect the BOJ to follow the U.S. move with additional monetary stimulus today.

“A sense of relief is probably spreading among BOJ policy makers for now because a big yen jump has been avoided,” said Jun Ishii, chief fixed-income strategist at Mitsubishi UFJ Morgan Stanley in Tokyo. Even so, “the governor will probably keep underlining that the expansion of the fund is a probable option for the BOJ.”

The Japanese currency has strengthened 0.4 percent against the dollar since the Fed move on Nov. 3, and traded at 80.83 at 12:55 p.m. today in Tokyo. The Nikkei yesterday advanced most in seven weeks as the dollar strengthened against the yen after the Fed’s announcement and is up 2.7 percent today.

The BOJ plans to buy 3.5 trillion yen in government debt, 500 billion yen each of corporate bonds and commercial paper, 450 billion yen in exchange-traded funds and 50 billion yen for real-estate investment trusts. The bank will buy these assets over a year.

Next Week

It will purchase J-REITs that have a trading record of more than 200 days a year and total value of more than 20 billion yen per annum, the BOJ said in a statement. The bank will start buying government debt early next week. REITs and ETFs will be purchased through trust banks from markets, it said.

Shirakawa yesterday called the asset-purchase fund an “unprecedented” and “extraordinary” step for a central bank, aimed at pushing down borrowing costs further.

“There’s about a 13 times difference in the amount of risk when comparing buying five-year U.S. Treasuries to ETF,” he said.

The central bank said today the “recovery seems to be pausing,” a more pessimistic assessment than in October, when it said the pace of the economic rebound is “slowing down.”

The BOJ program falls short of what’s needed to end deflation and alleviate the damage from the yen’s climb to a 15- year high against the dollar, economists from Citigroup Inc. to Morgan Stanley have said.

100 Trillion Yen

Asset purchases of 100 trillion yen “would be more appropriate,” Citigroup Chief Economist Willem Buiter and analysts including Tokyo-based Kiichi Murashima said last week. The BOJ may need to ease policy further in the January-March period, when slower inflation in the U.S. could prompt the Fed to buy more government bonds, Murashima said.

A strong yen threatens to depress Japan’s already weakening economic expansion by eroding profits of exporters such as Nissan Motor Co. and Sony Corp. and worsening deflation.

Nissan expects the yen’s strength to cut operating profits for the year ending March 2011 by 185 billion yen, the company said in a statement yesterday.

BOJ policy makers last week forecast consumer price growth of 0.1 percent in the fiscal year starting April 2011, and predicted a 0.6 percent increase the following year. Both projections are below the 1 percent price increase that board members consider representing price stability.

Government reports last week suggested that an appreciating currency and decreasing overseas demand for Japanese products are causing the nation’s economy to lose momentum. Factory production slumped by more than double the pace economists forecast and deflation deepened in September.

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