The Bank of Japan’s reluctance to fund government borrowing is set to be tested by the economy’s need for stimulus in the aftermath of the March 11 earthquake.
Prime Minister Naoto Kan’s bill for clearing wreckage and rebuilding roads, housing and utilities is forecast at 5 trillion yen ($62 billion) or higher by Nomura Holdings Inc., Morgan Stanley and Barclays Capital. With debt issuance poised to rise, BOJ Governor Masaaki Shirakawa warned last week the bank must avoid underwriting debt to retain its credibility.
The BOJ’s reluctance is an echo of the European Central Bank’s initial decision to refrain from buying government bonds as the euro-region’s sovereign-debt crisis spread a year ago, before it agreed to do so in May. As the scale of the efforts needed to restart an economy already shrinking at the end of 2010 becomes clear, Shirakawa and his colleagues may step up.
“This is something the BOJ should have done even before the earthquake,” said Takeo Hoshi, an economics professor at the University of California, San Diego and author of “Corporate Financing and Governance in Japan: The Road to the Future,” winner of Nikkei’s 2002 prize for best economics book. “It’s even more important for the Bank of Japan to support the recovery” in the aftermath of the earthquake, he said.
Additional monetary stimulus would help combat an appreciating yen, by increasing its supply. The nation’s currency climbed to a post-war high against the dollar on March 17, prompting Finance Minister Yoshihiko Noda the next day to request that the Group of Seven mount its first coordinated intervention in the foreign-exchange market since 2000.
The yen fell the most in more than two years during the day on March 18, before paring some of the losses to close down 2.1 percent at 80.58 per dollar. The drop in the currency, which helps bolster export competitiveness, offered a fillip to equities, with the Nikkei 225 Stock Average advancing 2.7 percent, limiting its loss since March 10 to 12 percent.
“The need to counter yen strength amid deflation will oblige the Bank of Japan to monetize the fiscal deficits needed to fund reconstruction,” Prasenjit Basu, an economist at Daiwa Capital Markets in Singapore, wrote in a March 17 note.
Policy makers cut the main interest rate to a range of zero to 0.1 percent last year to help bring an end to prolonged deflation, leaving asset purchases at their main instrument.
Shirakawa and his fellow board members last week expanded a fund used to buy items including Japanese government bonds, known as JGBs, exchange-traded funds and real-estate investment trusts by 5 trillion yen, to 10 trillion yen.
The BOJ kept a separate program of monthly JGB purchases at 1.8 trillion yen. The central bank has a rule of keeping its holdings of public debt at less than the value of banknotes outstanding. It also has a 3 trillion-yen venture-capital type facility designed to channel capital to growth industries.
“There are too many uncertainties yet” for the central bank to decide whether and how it will add stimulus, said Chiwoong Lee, a senior economist at Goldman Sachs Group Inc. in Tokyo. Should it take additional steps, they could range from increasing asset purchases to boosting the venture-capital program by defining companies that invest in the devastated northeast as fresh sources of growth, he said.
The key determinant for the magnitude of the hit to Japan’s economy will be the duration of power outages, which threaten to disrupt production, according to Lee.
Yesterday, the government said efforts to stabilize the Fukushima Dai-Ichi nuclear plant, crippled from the tsunami after the magnitude-9 temblor and discharging radiation, had some success, while a quick resolution is unlikely.
Tokyo Electric Power Co., owner of the 40-year-old power plant, has imposed rolling blackouts extending to Tokyo.
Sony Corp. and Nissan Motor Co. said they’re preparing to resume production at some factories. Sony plans to resume a plant that makes rechargeable batteries in Tochigi prefecture, northern Japan, from March 22, Hiroshi Okubo, a Tokyo-based spokesman, said yesterday. Nissan, Japan’s No. 2 automaker, said in a statement it will begin the resumption of operations at six factories today and some vehicle assembly from March 24.
Sony Chairman Howard Stringer said that recovery efforts may jump-start the country’s lagging economy as the country uses savings to rebuild. Japan last year fell behind China as the world’s second-largest economy, and the legacy of a burst asset bubble and financial crisis in the late 1990s has left it with persistent deflation and a record debt load.
Timing of Bill
Noda said last week that the government will compile a supplementary budget to pay for the recovery, while it will take beyond the end of the month to complete.
Barclays Capital analysts estimated the reconstruction budget at 5 trillion yen to 7 trillion yen in a March 18 research note. Nomura assumed 6 trillion yen in new spending during the fiscal year starting April 1. Morgan Stanley economist Takehiro Sato predicted “10 trillion yen or so,” noting it will take time to gauge the scope of what’s needed.
With Japan’s public debt already at about twice the size of its GDP, Moody’s Investors Service said last week that the disaster may push forward Japan’s “tipping point” for investors to lose confidence in the nation’s credit quality.
“The unsustainable sovereign debt position suggests that the BOJ will have to bear a bigger funding burden,” BNP Paribas SA strategists wrote in a March 18 note.
The financial crisis of 2007-2009 and Europe’s sovereign- debt turmoil that began in 2009 have pressed central bankers into uncharted territory. The Federal Reserve accumulated assets such as junk-rated debt as it sought to forestall a depression. More recently, the Fed pursued a $600 billion initiative to buy Treasuries in its effort to bring down the unemployment rate.
As the Greek debt crisis threatened to spread in May 2010, ECB President Jean-Claude Trichet oversaw a policy meeting where he said the bank hadn’t discussed the option of buying government bonds. He instead called for “decisive actions by governments” to curb borrowing.
The BOJ, too, may want Kan’s government to spell out how it will pay for additional spending and provide assurance that debt will be reined in over time, some analysts said.
“The government spent a lot and sold a lot of bonds after the Lehman shock occurred, and Japan greatly stepped back from the fiscal rehabilitation,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. “The BOJ is basically reluctant to rush in expanding its balance sheet.”
At the same time, a lack of inflationary pressure undermines the argument that BOJ debt purchases run the risk of spurring inflation. A government report this week is forecast to show consumer prices, excluding fresh food, fell 0.3 percent in February from a year before.
“Eventually what’s going to happen is the Bank of Japan has to be a buyer of last resort for JGBs,” said Julian Jessop, an economist at Capital Economics Ltd. in London. “The economic recovery will be more muted so the Bank of Japan will be forced to do more.”
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