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Japan economy severe, BOJ eyes steps: Shirakawa
Tue Dec 16, 2008 3:42am EST Email | Print | Share| Reprints | Single Page | Recommend (0) [-] Text [+]
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TOKYO (Reuters) - Bank of Japan Governor Masaaki Shirakawa said conditions are severe for Japan's economy and monetary conditions are rapidly tightening, in his bleakest comments yet on Japan's deepening recession.
Speaking just two days before Japan's central bank meets to review rates, Shirakawa said the BOJ would take appropriate action and he was examining the effects of quantitative easing.
The comments, which sent Japanese bond yields to nine-month lows on hopes of looser monetary policy, follow pressure from government officials on the BOJ to take further action to combat the global financial crisis.
"In addition to falling exports due to a slowdown in overseas economies, corporate profits, household finances and job conditions are worsening, and it is taking a toll on domestic private demand," Shirakawa told a parliamentary finance committee.
The central bank needed to downgrade its economic outlook, he said, adding: "Output, employment and consumption data were all severe."
Analysts said the biggest dive in the central bank's tankan business sentiment survey in three decades, released on Monday, had prompted Shirakawa's downbeat assessment.
"It's a near certainty the Bank of Japan will come up with something at its next policy meeting, maybe not quantitative easing but perhaps outright purchasing of commercial paper," said Chotaro Morita, chief strategist at Barclays Capital.
The U.S. Federal Reserve is expected to halve rates on Tuesday to 0.5 percent -- taking them almost as low as Japan's 0.3 percent rates -- as the crisis sends many rich countries into recession and slows growth in China and India.
GOVERNMENT PRESSURE
Japan, like the United States, is already in recession and Finance Minister Shoichi Nakagawa called on Tuesday for the BOJ to examine more measures to help the economy and ease a cash squeeze for companies as the year-end nears.
Shirakawa did not rule out taking more liquidity measures, but said he was wary of the central bank taking on credit risks.
Japanese government bonds rallied on the comments, on hopes of BOJ action, with the yield on two-year JGBs hitting a nine-month low.
"There is much significance in Shirakawa saying that monetary conditions are turning less accommodative. This raised hopes that the BOJ might take action this week," said Tetsuya Miura, chief fixed-income strategist at Shinko Securities.
Shirakawa said he was examining the effects of quantitative easing and zero interest rates -- a policy where central banks flood the banking system with money to promote lending.
Beset by a banking crisis, chronic deflation and lackluster growth, Japan followed such a policy for five years and only ended it in 2006.
Japanese media reported the BOJ would examine measures such as buying commercial paper outright, something the Federal Reserve has started due to the financial crisis, as a way to help corporations raise money.
Commercial paper is a form of short-term unsecured lending often used to raise working capital.
Also among measures BOJ could examine would be to boost the amount of long-term Japanese government bonds it purchases from the current 1.2 trillion yen ($13 billion) per month and expand the type of collateral it accepts in fund operations, the Nikkei business daily said, without citing sources.
The government last week outlined plans to help companies boost liquidity, including having the Development Bank of Japan, a state-affiliated financial institution, buy commercial paper, but Finance Minister Shoichi Nakagawa asked for more measures to be investigated by the central bank.
"We acknowledge the Bank of Japan's independence. But it is a responsibility stipulated under law that the Bank of Japan and the government keep in close contact with each other in guiding economic policy," Nakagawa told reporters.
"I hope the Bank of Japan reaches an appropriate conclusion at its two-day meeting, bearing in mind Japan's economic and liquidity conditions."
CASH SQUEEZE STEPS
Japanese media reported at the weekend that the government was asking the BOJ to take more action to ease a tight market for corporate financing that is leaving firms short of cash as a traditional squeeze looms at the end of the year.
The BOJ, whose policy board meets on Thursday and Friday, has been hesitant about directly buying risky commercial loans, but Shirakawa did not rule it out on Tuesday.
"When economic and financial conditions are severe, there is not necessarily a clear line dividing liquidity and credit risks. In that sense, we are not totally ruling out taking on risks," he said in parliament.
While the weak tankan results have fueled market speculation about a BOJ rate cut this week, many within the bank are reluctant to do so, preferring to gauge the effects of its rate cut in October, the Nikkei said without citing sources.
The BOJ has already unveiled steps to ease credit strains as the fallout from the global financial turmoil spreads, such as accepting a wider range of corporate debt as eligible collateral for its fund operations.
Japan's economy sank deeper into recession in the third quarter, fuelling fears that the world's second-largest economy is facing its longest contraction ever combined with a return to deflation.
The collapse in global demand has forced leading Japanese companies such as Sony and Canon to slash jobs and investments, and the yen's strength is threatening to further erode their export earnings.
Currently, the Bank of Japan buys commercial paper in its market operations to provide funds to banks, but only with a re-sale agreement rather than buying the debt outright.
($1=90.63 Yen)