Token gesture from Japan's central bank

Dec 04, 2009

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A further boost for the financial system was announced by the Japanese central bank at an unscheduled policy meeting this week.

It will offer up to $114bn of three-month loans to banks, in exchange for a range of collateral, at the overnight interest rate of 0.1%.

The aim is to bring three-month rates down and bolster the economy. While growth has returned, with unemployment falling and consumption ticking up, deflation has worsened: prices fell by an annual 2.2% in September.

Deflation is being reinforced by a strong yen, which reached a 14-year high of just under 85 to the dollar. This is lowering import prices and threatening export earnings. Speculation over Japanese intervention in the currency markets is mounting after various officials publicly worried about yen strength.

What the commentators said

 Markets had expected "something meatier", said Lex in the FT. This was far less aggressive than, say, boosting purchases of long-term government bonds or promising to keep rates low longer than markets expected. It's "pretty tame", agreed Richard Jerram of Macquarie Research.

Along with the unscheduled meeting, it suggests that the bank, under heavy pressure from the government, has secured some peace and quiet from the politicians with a "token" gesture. That's because Governor Masaaki Shirakawa has always been "sceptical" of the merits of quantitative easing-style policies, said The Economist.

As for yen strength, "there's no need to panic just yet", said Capital Economics. Japanese goods compete more on quality than price, so the main thing for exports is the global economy, which has provided a tailwind in the past few months. And in euro terms, the yen still remains some way below its peaks of late 2008 and early 2009.

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