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Thursday, Oct. 7, 2010


BOJ moves to prop up economy

In a welcome surprise for enterprises, the Bank of Japan on Tuesday announced an unexpected set of measures for further monetary relaxation. Adopting a de facto zero interest rate policy, the BOJ will guide its key short-term interest rate to a range of zero to 0.1 percent, from the previous 0.1 percent.

The central bank also decided to create a ¥5 trillion fund to buy long-term government bonds and debentures, including some risk assets, to inject liquidity into the economy. It had earlier introduced a ¥30 trillion fund-supply operation.

The BOJ indicated that the de facto zero interest rate policy will continue until it judges that "price stability is in sight." It defined price stability as the stabilization of the consumer price index in a positive range up to a 2 percent increase. This is close to setting an inflation target as demanded by some politicians.

These measures show that the BOJ has finally become serious about ending deflation and propping up the economy, which is suffering from a strong yen. It said that although the economy still shows signs of a moderate recovery, the pace of recovery is slowing down due to the sluggish state of overseas economies and the yen's rise. Its latest quarterly tankan business sentiment survey, whose results were announced last week, showed that enterprises fear that their business environments will deteriorate three months from now.

BOJ Gov. Masaaki Shirakawa said that though the effect of each measure taken by his bank is not big, he wanted to maximize the effect by presenting the measures as a package. The government will submit a supplementary budget for fiscal 2010 to the current Diet session. It is hoped that the BOJ measures and the new budget will work together to prevent the economy from dipping a second time.

But the U.S. Federal Reserve's expected move to further push monetary easing is likely to cause a problem. If the Japanese economy worsens, policy options for the BOJ will be limited. Another problem is that enterprises' appetite for loans is low. Both the BOJ and the government need to consider ways to increase that appetite.

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