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Bank of Japan joins bond buying spree to bolster economy

Holds benchmark interest rate at a range of zero to 0.1%

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The Japanese central bank moved to ease monetary policy on Wednesday, saying it would buy larger quantities of government bonds and other assets, following the in its show of resolve to shore up a shaky economic recovery.

The central bank, the , said it would expand its asset purchase and loan programme by 10 trillion yen, or $127 billion, to 80 trillion yen, the bank announced after a two-day board meeting that ended Wednesday. The purchase programme was also extended by six months, to the end of 2013.

The central bank downgraded its assessment of the country’s export-driven economy, blaming a slowdown in global demand and fresh uncertainties emerging from the anti-Japanese protests this week in China, a major trading partner.

A PUSH FOR GROWTH
BANK OF JAPAN
  • To buy larger amounts of government bonds and other assets
  • To expand asset purchase and loan programme by 10 trillion yen, or $127 billion, to 80 trillion yen 
  • Purchase programme extended to end of 2013
  • Downgraded assessment of the coun try's export-driven economy
  • Held benchmark  steady  at zero to 0.1%
US FEDERAL RESERVE
  • To announce plans for October as part of a new process 
  • To hold short-term interest rates near zero until at least mid-2015
  • To cut borrowing costs by telling investors that  short-term rates will remain low for longer duration
  • Plans to use $40 billion every month to buy mortgage-backed securities  
EUROPEAN CENTRAL BANK  
  • Held benchmark rate at a record low of 0.75 per cent
  • To buy bonds with maturities of up to 3 years
  • To give govts time to come up with long-term response to the debt crisis
  • To stop buying bonds of country not complying with policy conditions
  • To forgo its senior creditor status on the bonds it purchases

As expected, it held its benchmark interest rate steady at a range of zero to 0.1 per cent.

Markets welcomed the move, with the jumping 1.39 per cent to 9,251.01 in midafternoon trade. The yen slipped to a one-month low of 79.18 to the dollar, offering relief to Japanese exporters, who benefit from a weaker home currency.

Finance Minister praised the bank’s additional easing as “more than expected,” according to Kyodo News.

The Bank of Japan’s governor, , has come under intense pressure from government officials to keep up the bank’s support of the fragile Japanese economy. The bank set a 1 per cent inflation target in February and increased asset purchases in April.

Shirakawa has held off from further easing since then, as economic growth appeared to gain momentum, buoyed by reconstruction demand in the aftermath of the natural and nuclear disasters last year.

But the outlook has worsened in recent weeks, with sluggish exports causing an unexpected dip in industrial production. Gross domestic product for the April-to-June quarter grew at an annual rate of 0.7 per cent from the previous quarter, according to government data released this month, a far slower clip than initially estimated.

And Japan continues to be mired in deflation, with its core price index having fallen 0.3 per cent in July from a year earlier.

“The pickup in economic activity has come to a pause,” the Bank of Japan said in a statement after the decision. “There remains a high degree of uncertainty about the global economy,” including continued debt woes in Europe and lackluster growth in the United States, it said.

The bank’s concerns echoed those made by economists in recent weeks.

“Incoming data suggest that the Japanese economy is now losing steam much more rapidly and sharply than we expected,” Masamichi Adachi, an economist at JPMorgan Securities Japan, said in a note to clients ahead of the bank’s decision. “The possibility of recession cannot be ruled out, especially if recovery of global demand in the coming quarters fails to materialise.”

Fears of an economic slowdown appear to have overridden caution at the Bank of Japan that too loose a monetary policy will lead to runaway inflation. Takuji Aida, economist for Japan at UBS, said it would probably be “a few years until the BOJ’s 1 per cent goal can be reached.” He said that any recovery in overseas demand would ultimately depend on the US economy.

Japan also faces political uncertainties. The governing Democratic Party, which has suffered defections amid plunging ratings, is under pressure from the main opposition party to call nationwide elections. A standoff in Parliament has blocked the government from issuing deficit-financing bonds, forcing Prime Minister Yoshihiko Noda to postpone scheduled public spending for the first time in decades.

If the standoff continues and the government has to postpone new spending into December, the BNP Paribas economist Ryutaro Kono said in a note last week, “the negative impact to the macro economy will not be negligible.”


 

© 2012 The New York Times News Service

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