Asia Times: BOJ's easy-money policy showing first effects


	May 3, 2001	atimes.com

Japan

BOJ's easy-money policy showing first effects

TOKYO - The effects of the Bank of Japan's quantitative easing are slowly trickling into the money market, but their impact on the real economy still remains uncertain, analysts say.

The BOJ's ultra-easy credit policy, in place for six weeks now, has brought fund-raising costs down to virtually zero, thanks to the 1 trillion yen (US$8.2 billion) of excess funds in the money market. For example, a bank that borrows 10 billion yen at the overnight call rate of 0.01 percent now has to pay only 2,739 yen in interes.

Not only is the BOJ's quantitative easing pushing down the overnight call rate, government debt securities such as three-month and six-month treasury bills are also experiencing a drop in yields to nearly zero. For this reason, many analysts assert that the quantitative easing is having a stronger impact on rates than the BOJ's previous zero-rate policy.

The central bank's pledge of keeping the current quantitative easing steps in place until the consumer price index consistently posts positive gains is also having a major impact, analysts say. In fact, medium- to long-term rates are also declining. For instance, two-year government note yields have dipped below 0.1 percent and 10-year bond yields are in the 1.2 percent range. The drop in market rates has also spilled over to bank lending rates, analysts say. Short-term and long-term prime lending rates - which are benchmarks for corporate loans - have fallen to record lows.

Despite hopes that banks flush with excess funds would step up their lending, many have merely shifted these excess funds to the Japanese government bond market. Moreover, bank lending is expected to continue declining because companies placing a priority on cutting back their own interest-bearing debt are showing weak fund demand. Financial institutions putting a premium on clearing their bad debts off their balance sheets are also shying away from additional investment in such high-risk vehicles as stocks or foreign-currency-denominated bonds, analysts say.

Indeed, BOJ Governor Masaru Hayami asserted after the recent Group of Seven meeting of finance ministers and central bankers that monetary policy alone cannot put the economy back on a steady recovery track. For more funds to begin circulating within the real economy, corporate funding demand must recover and financial institutions have to shore up their finances to be able to meet such demand, analysts say.

The BOJ's quantitative easing could also have a salutary effect if overseas investors begin to view Japan more favorably. In the five weeks following the BOJ's easing announcement on March 19, overseas investors were net buyers of Japanese stocks by nearly 1.2 trillion yen.

If structural reforms advocated by the new Koizumi cabinet and quantitative easing raise expectations for a full economic recovery, domestic companies and financial institutions may be able to escape from the burdens of slumping share prices and find themselves revitalized by increased direct investment in Japan from overseas, analysts say.

The BOJ, for its part, drained more funds than it supplied to the money market in April for the first time since August 2000. The BOJ cut back on the funds that it provided and drained off a net 2.96 trillion yen. It did so to address the excess funds in the market due to government payments, including those for public works and pension payments, into the private sector with the start of the new fiscal year.

According to the central bank, both short-term and long-term government debt purchases under repurchase agreements declined in April. On the other hand, the BOJ increased outright purchases of short-term government debt by about 600 billion a month, boosting the total by 66 percent on the month to 1.54 trillion yen.

However, because the government is expected to drain funds from the markets through bond issues and borrowing to fund payments to local governments, the central bank will need to provide funds to maintain its balance of current accounts target of 5 trillion yen, analysts say.

Meanwhile, new Finance Minister Masajuro Shiokawa said on a television program on Tuesday night that he urged the BOJ's Hayami to stay in his post. Hayami has recently faced a whirlwind of questions following reports that he expressed a desire to resign to former finance minister Kiichi Miyazawa. Hayami, however, issued a statement in Washington, denying that he plans to step down.

Shiokawa said that on their way to Washington, for the G7 meeting of finance ministers and central bankers held last Saturday, Hayami asserted that "there was a time when my health was deteriorating and I considered stepping down, but now I am much better".

Shiokawa said that, in response, he urged Hayami to stay if that were the case, emphasizing that this was a crucial time, with the start of the new Koizumi government and other factors. When asked about Hayami's response, Shiokawa said that the central bank chief's reaction was limited to "Well, hmmmm."

(Asia Pulse)

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