In a surprise move, the Bank of Japan (BOJ) has decided to further ease monetary policy to try to curb deflation and to boost the ailing economy. Japanese stocks rose on the move while the yen declined. The Bank of Japan moved Tuesday to head off yet another recession by loosening monetary policy for the fourth time in a year.
The BOJ unexpectedly raised the target for bank reserves from $40 to $50 billion and also increased its monthly purchase of long term Japanese government bonds. The injection of cash is aimed at energizing the country's banking sector, which is struggling under a government plan to write off mountains of bad debts.
Economist James Malcolm of investment bank JP Morgan in Tokyo says the Bank of Japan was under increasing pressure to take action. For weeks, he notes, Japanese Finance Minister Masajuro Shiokawa and other top officials were pressuring it to do more to keep prices from falling further. "If it had not moved today, the concern in the market would have been extremely high that there is a lot of economic deterioration, that there is a lot of pressure building both externally and internally on the BOJ and that it was not being at all responsive. What today's move suggests is that it being forward looking and responsive and giving some slack to the market," Malcolm said. By lifting the liquidity requirement for commercial banks and by purchasing more government bonds, the central bank will effectively flood the banking system with additional funds for borrowers to tap.
Mr. Malcolm and other economists agree that the central bank is hoping to counter the painful economic reform plan announced by Prime Minister Junichiro Koizumi. But they expect that Tuesday's moves will only have a minor impact. "I do not think there is going to be any real economic impact because the move was marginal, but really, in terms of monetary policy and stimulating the economy, the BOJ has pretty well run out of scope," says Mr. Malcolm. "If there is blame to be assigned for not supporting the economy it is going to be with Mr. Koizumi for tightening fiscal policy too aggressively."
The Japanese yen fell in response to the BOJ's announcement, sinking to 123.2 on the dollar. Stocks, which fell to a 16-year low Monday, rebounded. The Nikkei Average firmed nearly four-percent. Shares in commercial banks and construction companies, which will benefit from cheaper credit ended with strong gains.