Bank of Japan to Engage in Stimulus Spending

My colleague Dean Popplewell, made some interesting comments regarding my post yesterday on the double dilemma facing Japan. As I noted in the commentary, Japan is dealing with an appreciating yen that threatens to price its exports out of reach for much of its markets, while at the same time, consumer prices have declined for eight straight months leading to fears that a debilitating deflation cycle is unavoidable.

Dean, in his typically succinct approach, noted that the Bank of Japan is really in a no-win situation. With a 0.1 percent interest rate, the Bank is “out of ammo” with respect to preventing further yen appreciation through an interest rate reduction. On the other side of the equation, the availability of nearly-free money within the retail banking system has done little to prevent price deflation within the economy. For those keeping score, the Bank is 0 for 2.

[mserve id=”Central_Bank_BOJ.jpeg” align=”left” width=”400″ caption=”Bank of Japan” alt=”Central Bank of Japan BOJ” title=”Bank of Japan”]Earlier this year, the Bank of Japan – despite evidence clearly pointing to growing deflation within the economy – made yen depreciation and by extension protection of Japan’s exports, the main focus when it repeatedly voted to hold interest rates at 0.1 percent. The Bank obliquely acknowledged that prices had indeed retraced, describing the economy as being in a “mild deflationary situation” earlier this year.

Meek language that includes “mild” as a descriptor does little to influence markets, but it does speak volumes with respect to the central bank’s priorities. Of course, when the Bank made this pronouncement, unemployment was at a still-low 4.2 percent – since then, unemployment has climbed as high as 5.7 percent and is now in the 5.4 percent range which by Japan’s standards, is an unemployment crisis.

Indeed, it was this rising awareness of the unemployment rate and the overall economy that saw the opposition Democratic Party of Japan defeat the ruling coalition government in the election held August 30th. The coalition was formed around the Liberal Democratic Party which, apart from a period of less than a year in 1993, has ruled the country since first being formed in 1955. So great was the demand for change, that the election marked the worst defeat for a governing party in Japan’s modern era.

Taking these factors into account, Dean reasoned that the Bank of Japan would be forced to address the growing deflation, and as usual, he was right on the money. This morning we learned that the Bank of Japan held an “emergency” meeting yesterday and the Bank announced that it would be providing up to 10 trillion yen (US$114 bn) in increased liquidity to encourage banks to increase lending to consumers and businesses.

The reaction from analysts was universal in its assessment that the move had more to do with politics than an actual attempt to support the economy.

Dariusz Kowalczyk, Chief Investment Strategist with SJS Markets said, “This must be government pressure – if they (the Bank of Japan) were free from pressure, they wouldn’t have done anything, because they have been saying their assessment hasn’t changed”.

Good call, Dean.

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