Japan’s Central Bank Holds Steady Amid Market Volatility

In a unanimous vote at the end of a two-day policy meeting, the bank’s board decided to stay pat on a policy to grow its base money, or the cash and deposits the bank holds, by between 60 trillion yen and 70 trillion yen a year ($600 billion to $700 billion a year), which in turn increases the funds that flow through the Japanese economy and encourages companies to borrow and invest.

The bank also raised its assessment of the Japanese economy, saying Japan’s economy was “picking up,” a slight improvement over its appraisal last month that the economy was “starting to pick up.” The brighter outlook came after revised government data showed Japan’s economy grew at a rate of 1.0 percent between January and March, faster than a preliminary estimate of 0.9 percent, due to stronger corporate capital and household spending

“Japan’s economy is expected to return to a moderate recovery path” thanks to resilient domestic demand and the effects of its aggressive monetary easing program, the bank said in a statement.

Since April, the Bank of Japan has embarked on monetary stimulus of an unprecedented scale in a bid to jolt the Japanese economy out of 15 years of deflation, part of a wider economic growth push introduced by Prime Minister Shinzo Abe.

Under Haruhiko Kuroda, its new governor, the central bank pledged to double Japan’s money supply in two years through aggressive purchases of government bonds and other assets. It also committed to a target to hit 2 percent inflation over the next two years, a goal that some economists say is overly ambitious in a country that has seen prices fall for 15 years.

In a sign of faltering confidence, one board member, Takahide Kiuchi, proposed replacing that two-year target with a less ambitious commitment to achieving 2 percent inflation “in the medium to long term.” That proposal was voted down by the other eight members on the bank’s policy board, according to the bank’s statement.

“It’s true that the road to 2 percent will be long,” Mr. Kuroda said at a news conference following the decision. To get there, he said, other facets of Prime Minister Abe’s economic growth program needed to kick in, bringing about a rebound in jobs, wages and demand. “Once the entire economy enters a positive cycle, we will see prices stabilize at 2 percent,” he said, adding that for now, the bank’s policy push was “on track.”

The central bank also held off from introducing measures to keep down Japan’s long-term interest rates, a move expected by some economists ahead of the meeting.

Yields on benchmark 10-year government bonds spiked in late May as prices of those bonds slumped, causing investor jitters over Japan’s ability to keep funding, and servicing, its colossal public debt. Those fears helped end a spectacular rally in the Japanese stock market this year, bringing several weeks of volatile trading.

The Nikkei 225 stock index fell almost 200 points, or 1.5 percent, in Tokyo on Tuesday, much of that loss coming after the central bank’s announcement, marking another day of turbulent trade

One measure floated by economists that might calm investor nerves had been to extend a low-interest loan program that would make it easier for financial institutions to buy government bonds even if interest rates started rising. But that runs counter to the bank’s goal of shifting corporate investment out of low-interest bonds to higher-yielding equities and borrowing.

Mr. Kuroda said that the board had discussed such measures, but ultimately decided fresh steps were unnecessary for the time being. He has said that the recent rise in long-term interest rates is a healthy reflection of inflation expectations, and does not pose an immediate threat to the Japanese economy.

He stressed that the bank has had a measure of success in reducing volatility in bond markets by conducting its bond purchases more frequently, in smaller amounts. He said that the bank would sustain those efforts, and would watch financial markets closely.

“We continue to be wary of movements in long-term interest rates, especially undesirable spikes in volatility, and will keep up efforts to reduce that volatility,” he said. “But the economy is on a solid path to recovery, and I expect financial markets to soon reflect that, and regain composure.”

Article source: http://www.nytimes.com/2013/06/12/business/global/japans-central-bank-holds-steady-amid-market-volatility.html?partner=rss&emc=rss