The Bank of Japan Does as Little as Possible
And so, as the world watched breathlessly, Governor Masaaki Shirakawa, that bold and valiant leader of the Bank of Japan rushed home from Wyoming an entire day early in order to hold an emergency meeting of the board of the BOJ. I will let the folk’s at MarketWatch give you a description of what happened next:
"Japan’s central bank agreed at an emergency monetary-policy meeting to take new steps to rein in the soaring yen and pump up the slumping economy, in the latest sign of currency worries rippling around the world.
The Bank of Japan’s decision to expand a special low-interest lending facility is part of a concerted effort, through words and actions, by Tokyo’s policy makers to blunt the yen’s moves."
Give the folks at Marketwatch high marks for professionalism- because they somehow managed to restrain themselves from inserting the word ‘grudgingly’ between the words ‘bank’ and ‘agreed’. In fact, all that the bank did was to expand the emergency loan program by 50% – adding the equivalent of $116 billion dollars to the credit line.
I was not impressed and neither was the rest of the market. Whether you are looking at the EUR/JPY or the USD/JPY the result is the same – a rise over the day or so prior to the announcement followed by a retracement to the starting point of that rise after the announcement was made.
The Yen is as strong as ever. Mr. Shirakawa might as well have stayed in Wyoming and gotten in some more trout fishing.
Of course, 2 things have to be remembered here: First, thanks to the extremely low inflation followed by deflation in Japan compared to the modest but higher inflation rates in Europe and the US the USD/JPY would actually have to be all the way down to 55.00 on the USD/JPY in order to be equivalent to the low achieved in April of 1995- this means that Japanese exporters are not actually in the same position that they were in back then.
And, second, given the sheer size of the Japanese national debt the BOJ lives in abject terror of any significant form of inflation which would drive up interest rates on that debt to a point where interest would largely swallow the government’s budget.
So the BOJ is always, at least subconsciously, battling against inflation. This is the reason why their response to government pressure was a largely symbolic one- A sort of ‘intervention lite’ that depended for its effect on the drama of an emergency meeting followed by an announcement of SOMETHING.
And, unfortunately, because that something is a short term lending program (The new money is for loans of 6 months or less) it has even less impact than it might otherwise have had- in central bank speak the short terms of the lending are said to "sterilize" the monetary impact. The problem with such thinking is that "sterilization" leads to sterile impacts. As the market has already demonstrated.
But it would have been foolish to expect more than this in an opening shot. As I noted above the BOJ has reasons to worry about the impact of inflation. The problem is that they do not yet appreciate the destructive power of deflation. At this point the Prime Minister and the Minister of Finance actually do- or seem to anyway. It is important to remember that the real reason that the yen needs to weaken is NOT so much to assist exporters but rather to defeat deflation. So this struggle between the BOJ and the Government will continue. And we should expect to see yet more rhetoric between now and the next regular meeting of the BOJ- which is only about a week away.