Bank of Japan drips out more stimulus

An electronic stock board displays stock information Friday at a securities firm in Tokyo. Japan’s central bank opted Friday for only a modest expansion of its stimulus plan.
An electronic stock board displays stock information Friday at a securities firm in Tokyo. Japan’s central bank opted Friday for only a modest expansion of its stimulus plan.

TOKYO -- As Japan's economy limped into the second half of the year, some analysts hoped that the central bank would take new, radical steps. It could move its benchmark interest rate further below zero. It could drop cash directly into the arms of Japanese consumers -- so-called helicopter money.

Instead, the Bank of Japan chose to keep things at a decidedly lower altitude, at least for now.

The central bank said after its policy meeting Friday that it would only slightly expand deflation-fighting stimulus, with changes that ranked at the cautious end of what analysts and investors had been expecting.

But it also said it would carry out a "comprehensive assessment" of its approach, a tacit admission that it had so far been unable to defeat the debilitating wage and price stagnation afflicting the Japanese economy.

That review, which will be delivered at its next meeting in September is likely to stir speculation about whether the bank will try more drastic maneuvers to get the economy rolling.

The more extreme options include helicopter money, a catchall term for dumping funds straight into the economy by giving it to consumers or printing new money to finance more government spending. Central bankers generally see this as dangerous, but some specialists say Japan may be running out of options.

The central bank "clearly disappointed the market today," said Michael Moen, a bond manager at Aberdeen Asset Management.

"Reading between the lines, the bank appears to be acknowledging the limits of its policy tools, and the focus going forward will need to be on a combination of fiscal and monetary stimulus," he said.

There are few weapons in the normal central banking arsenal that the bank has not tried. Its benchmark interest rate is already set below zero, a move intended to try to force companies to invest money rather than hoard it. It is buying government bonds at a rate of 80 trillion yen, or $770 billion, a year to keep banks flush with cash to lend.

Even so, consumer prices were down 0.5 percent in June from a year earlier, and the economy has bounced between periods of growth and contraction.

Since Prime Minister Shinzo Abe came to power at the end of 2012 on a promise to rekindle economic growth, his government has often seemed to leave much of the work to the central bank. Japan has the heaviest public debt load in the world, and Abe's administration is officially committed to reducing the deficit, so letting the central bank spend instead of the government is less contentious.

But as his country's economy has struggled to grow at a meaningful pace, Abe has become less restrained. In June he postponed an increase in the national sales tax, and his government is going to put in place spending measures that Abe said this week would probably be worth about $274 billion. Details are expected to be announced next week.

This more aggressive attitude, combined with a recent visit to Tokyo by Ben Bernanke, the former Federal Reserve chairman, had convinced some analysts and investors that the Bank of Japan might start to simply print money to pay for the spending.

Katsunori Kitakura, a strategist at Sumi Trust, a Japanese asset manager, said he believed the Bank of Japan was essentially buying time with its small move Friday and would take more decisive action once it assessed the government's spending plans.

"Only once the government has outlined its fiscal spending measures do we expect the central bank to make a move," Kitakura said.

The yen briefly jumped almost 3 percent against the dollar after the central bank announced its policy Friday and was up 1.6 percent late in the Asian trading day. A stronger yen is damaging to many Japanese companies, which would receive less in exchange for their exports. Traders had sold the currency in anticipation that more stimulus spending would weaken it.

Yet Friday, the bank left its policy rate unchanged at minus 0.1 percent and said it would continue buying the same amount of government debt. And the central bank came nowhere close to introducing helicopter money.

Instead, it announced that it would increase the scale of a program to buy exchange-traded stock funds to $59 billion a year from $32 billion, and it doubled the size of a dollar-denominated lending program aimed at Japanese companies operating overseas to $12 billion.

The bank's governor, Haruhiko Kuroda, said he thought there were still more conventional policy levers left to pull.

"I don't believe we're approaching the limits of negative interest rates or qualitative and quantitative easing," Kuroda said, referring in part to the bank's bond-buying program. "We've been pursuing an aggressive monetary policy for three years, and it's a natural time for a review."

Kuroda said that the bank could push interest rates further into negative territory, noting that they are even further below zero in some countries in Europe.

He said he was against directly financing government spending with newly created money, a practice that has led to out-of-control inflation in some countries. But he suggested he was open to more nuanced cooperation between the government and the central bank.

"The right policy mix can produce synergies between fiscal and monetary policy," he said, "but what we're doing is totally different from simply monetizing government debt."

Business on 07/30/2016

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