BOJ decides to introduce additional easing measures to combat COVID-19 fallout

Source: Xinhua | 2020-03-17

The Bank of Japan (BOJ) on Monday decided to introduce additional monetary easing measures in a bid to stabilize financial markets amid recent turmoil owing to the impact of the global spread of the novel coronavirus.

In an emergency meeting convened Monday, the BOJ decided to expand its asset purchase program through the increased accumulation of exchange-traded fund (ETF) securities and corporate bonds.

The central bank's ETF purchases will be doubled from the current 6 trillion yen to an annual pace of 12 trillion yen (113.34 billion U.S. dollars).

The bank also said it would increase its target bond purchases and commercial paper by 2 trillion yen (18.89 billion U.S. dollars) by September.

Japan's central bank also announced a new policy enabling it to provide loans against corporate debt of about 8 trillion yen (75.56 billion U.S. dollars) as of the end of February as collateral at the interest rate of zero percent with maturity of up to one year.

The BOJ, however, opted not to plunge its short-term interest rates further into negative territory, past the current level of 0.1 percent, amid concerns such a move diminishes profits at commercial banks, in a move criticized by some economists and one which failed to impress market players.

The central bank's emergency meeting Monday came on the heels of the U.S. Federal Reserve suddenly cutting its target range for the federal funds rate by 1.00 percentage point to 0.00 to 0.25 percent, to add stability to financial markets amid the spread of the coronavirus.

Following the meeting, the BOJ issued a statement saying that additional easing measures could be taken if necessary, despite leading economists believing the bank is running out of policy tools.

"The bank will closely monitor the impact of COVID-19 for the time being and will not hesitate to take additional easing measures if necessary," the BOJ said in a statement, which also noted that the consumer price index is "likely to be somewhat weak for the time being," owing to falling crude oil prices.

In terms of its outlook for the economy and price moves looking ahead, the central bank downgraded its view of the economy. "Japan's economic activity is likely to remain weak for the time being, mainly affected by the outbreak of COVID-19," the bank said.

The latest view compares to its assessment in January which stated, "Japan's economy is likely to continue on an expanding trend through fiscal 2021."

BOJ Governor Haruhiko Kuroda, at a post-meeting press conference, conceded that the coronavirus has already dented Japan's fragile economy, with tourism, exports and consumption all taking a significant hit.

"The coronavirus has already had an impact on Japan's economy through a decline in inbound tourism, as well as on exports, output and consumption. Event cancellations and people staying home have led to a sharp slump in consumption. That's why we revised down our economic assessment," Kuroda said.

"Given the fact the epidemic is spreading with a lag among various countries, the impact of the virus could continue for the time being," the BOJ chief added.

In terms of its emergency decision to roll out more easing measures for the first time since July 2016 when it increased its purchases of ETFs by nearly 50 percent to an annual pace of about 6 trillion yen (56.66 billion dollars) from around 3.3 trillion yen, Kuroda said it was important to expedite action prior to the end of the business year, in the interest of corporate finances and to combat market volatility.

"The BOJ decided it was necessary to take necessary action quickly, particularly ahead of the March fiscal year-end, to ensure corporate financing remains smooth and markets restore stability."

The central bank, however, has faced criticism from leading economists for what they have described as the BOJ's somewhat weak-kneed policy response to the effects of the pandemic spread, particular on its decision to stay pat on its key interest rate, compared to other central banks globally lowering theirs.

"Concern is growing that the virus damage will spread to such an extent that monetary policy cannot contain its impact on the economy," Shingo Ide, chief equity strategist at the NLI Research Institute, said of the BOJ's latest moves.

On this point, Kuroda said that further moves could be taken.

"I don't think we have reached a limit on how deep we can cut interest rates. If necessary, we can deepen negative rates further. But what's necessary now is to ensure small and midsize firms have ample funding, and to restore market stability," said Kuroda, adding that further liquidity could be pumped into the market and bond buying increased.

While conceding that lowering interest rates further into negative territory would hurt commercial banks' profits until the economy expands, Kuroda maintained the bank's ever-optimistic and repetitive stance that further easing measures could be taken.

"If the economy and prices come under further pressure, we will of course consider additional monetary easing steps," said Kuroda, who went on to say equivocally that in terms of recent volatility in currency markets if the yen rises "affect the economy, prices and financial conditions in Japan significantly, we may need to ponder a response."

Some market analysts suggested the severity of the situation had not been fully taken into account by the BOJ, with Kuroda's rosy comments doing little to quell concerns, against a backdrop of Japan's economic decline and continued global spread of the pandemic.

Fear is mounting as there are no signs that the spread of the virus is abating, said Maki Sawada, vice president of the investment research and investor services department at Nomura Securities Co.

"Unless we see a clear hint, like a slowdown in the number of infections globally, the market will not show an upturn as monetary policies will not eradicate the virus itself," Sawada added.

The latest easing measures by the central bank and Kuroda's dovish remarks came as Japan's economy contracted an annualized 7.1 percent from the previous quarter in the October-December period last year, downwardly revised from an initial shrinkage of 6.3 percent, according to the government's figures released March 9.

The contraction in inflation adjusted terms equates to a 1.8 percent decline on a seasonally adjusted quarterly basis, the Cabinet Office said, with the first contraction in five quarters coming after Japan's sales tax hike from 8 to 10 percent last October being larger than median economists' forecasts.

The revised figure compares to an annualized 7.4 percent decline booked in the April-June quarter of 2014 after the consumption tax here was previously raised from 5 to 8 percent in April the same year.

In terms of the market's reaction to the BOJ's new easing measures, investors were largely unimpressed, local brokers said, with Japan's benchmark Nikkei stock index on Monday closing at its lowest level since November 2016.

The BOJ was scheduled to hold its monthly two-day policy setting meeting on Wednesday, but opted to move up its meeting to a one-day emergency gathering Monday.