The Bank of Japan backed only “technical improvements” to Japan’s monetary easing measures at its Policy Board meeting on July 12, refusing to join the global trend toward further easing.
"While there are many instances when the policies of many nations end up in the same direction, we will not mechanically link our policy (to such moves)," BOJ Governor Masaaki Shirakawa said at a news conference after the meeting.
The July 12 decision amounted to a switch in the weighting of the BOJ's asset-purchase program. The amount used to purchase short-term government bonds with maturities of less than one year from financial institutions was increased by 5 trillion yen ($63.1 billion) to 9.5 trillion yen, but 5 trillion yen was cut from the fixed-rate funds-supplying operation against pooled collateral. Overall, that meant no change in the funds being pumped into the market.
The outstanding amount in the funds-supplying operation was reduced because financial institutions are not bidding to take on the loans, which must be repaid in six months. The financial institutions already have abundant funds on hand. Moreover, the funds are not being used as loans for companies interested in capital investment. The lack of that sort of investment is one reason for the slow recovery of the economy.
In many instances, the funds provided to financial institutions from the BOJ end up being used to purchase government bonds. Many of those bonds end up being acquired by the BOJ, meaning the funds are only circulating between the BOJ and the financial institutions without boosting the economy.
The BOJ’s failure to announce substantive additional monetary easing pushed up the yen against other currencies.
In July, the European Central Bank lowered a key interest rate and the Bank of England also expanded its monetary easing. Newly emerging economies such as China and Brazil have also reduced their key interest rates. On July 12, the Bank of Korea lowered a key interest rate from 3.25 percent to 3 percent, the first reduction in three years and five months.
The Federal Reserve Board in the United States also indicated that further measures may be necessary to stimulate the economy.
The cautious approach of the BOJ reflects a view that domestic demand remains firm.
Shirakawa said spending on quake reconstruction, improved quake safety measures and the construction of new power generating facilities, as well as consumer spending by senior citizens, was helping to prop up demand.
"Domestic demand is stronger than expected and, while overseas demand remains weak, there would be further recovery if foreign economies got away from slower growth," Shirakawa said.
However, not following the international trend toward monetary easing could raise the risk of an appreciation of the yen against other major currencies similar to the rise last summer. That would hurt export industries such as automobile and electrical equipment manufacturing, hitting exporters with a double whammy of a strong yen and a weak overseas economy.
(This article was written by Yukio Hashimoto and Ikki Yamakawa in Washington.)
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