BOJ decides on new monetary easing to fight deflation+

TOKYO, Dec. 1 Kyodo -
The Bank of Japan decided Tuesday to inject about 10 trillion yen into the
financial system, introducing a new fund-supply operation to lower longer-term
interest rates to fight deflation.
The central bank made the decision at an extraordinary policy meeting held at a
time when the government has been putting pressure on the BOJ to do more to
support the economy amid falling consumer prices and the yen's steep
appreciation.
Prime Minister Yukio Hatoyama's government, which was launched in September,
plans to compile an additional stimulus package this week to address the rising
yen and falling stock prices. The BOJ said its new operation, together with the
government's efforts, should firmly support the Japanese economy.
Under the new liquidity measure, the BOJ will lend the funds to financial
institutions for three months at a fixed interest rate of 0.1 percent against
collateral, including government bonds and corporate debt.
The step is expected to help lower three-month interest rates in short-term
money markets. Three- to six-month rates in some markets are currently higher
than those in the United States, contributing to the recent rise in the yen
against the dollar. The BOJ appears to be aiming to curb the yen's rise through
the new operation.
''We can say this is quantitative easing in a broad sense,'' Bank of Japan
Governor Masaaki Shirakawa said during a press conference, referring to the new
operation, which he said is expected to help prevent banks from facing
liquidity constraints.
''Since late last week, there were some movements in international financial
markets, with the yen rising and stocks falling. We considered these movements
could adversely affect'' corporations, Shirakawa said. He added that the new
operation should have ''some impact'' on the currency market.
The government welcomed the BOJ's additional monetary easing, with Hatoyama
saying, ''I'm delighted the government and the BOJ were able to share the same
perception (of economic conditions).''
''The BOJ deserves praise for its actions,'' the prime minister said.
Finance Minister Hirohisa Fujii said separately that the central bank has taken
''appropriate action.''
Seven of the BOJ Policy Board's eight members attended the meeting and the
central bank's new operation was decided by a unanimous vote.
The board also voted unanimously to leave the bank's key short-term interest
rate unchanged at 0.1 percent for the time being. The central bank last cut its
target rate for unsecured overnight call money in December last year, lowering
the rate from 0.3 percent.
The yield on the benchmark 10-year government bond fell sharply Tuesday,
closing below 1.2 percent for the first time since Dec. 30, after the vehicle
drew buying on hopes for monetary easing by the central bank.
The extraordinary policy meeting was convened ahead of talks Wednesday between
Hatoyama and Shirakawa on the economy.
The central bank announced the new monetary easing measure apparently in view
of the government's stepped up efforts to address fears over a double-dip
recession.
The Japanese government said late last month that Japan has fallen back into
deflation. The BOJ is projecting that Japan will experience at least three
years of deflation.
The U.S. dollar hit a 14-year low in the upper 84 yen range at one point in
Tokyo on Friday, threatening recovery in the export-led Japanese economy.
The dollar recovered some of its lost ground and reached the mid-87 yen level
Tuesday before the policy meeting on expectations for additional measures by
the BOJ. But the dollar later lost some of its momentum as the measure
announced after the BOJ meeting fell short of market participants'
expectations.
Some Cabinet members have criticized the BOJ for what they view as its overly
optimistic economic outlook, urging the central bank to do more to support the
economy.
Shirakawa vowed Monday that the BOJ will do ''its utmost'' to overcome
deflation, admitting in a speech in Nagoya, Aichi Prefecture, for the first
time during the current downturn that Japan is in deflation.
The BOJ last held a monetary policy meeting Nov. 19 and 20. It was originally
scheduled to hold its next policy meeting Dec. 17 and 18.
Before the emergency policy meeting, some in the Cabinet had been pressuring
the BOJ to reintroduce a quantitative easing policy.
Fujii said Tuesday morning that he believes there would be positive effects on
the economy if the central bank carried out quantitative monetary easing.
Deputy Prime Minister Naoto Kan, who concurrently serves as state minister for
economic and fiscal policy, said Tuesday, ''Generally speaking, quantitative
easing has an impact on constraining deflation,'' adding, ''We believe the BOJ
will fulfill some expectations.''
The BOJ last conducted the so-called quantitative easing policy for about five
years from March 2001. Under the unconventional policy, the BOJ flooded the
market with liquidity by targeting the outstanding balance of current account
deposits held by private financial institutions at the central bank, instead of
the level of the key short-term interest rate.
The central bank's latest policy step stopped short of that kind of
quantitative easing.
==Kyodo
2009-12-01 23:31:46