How to say ‘QE in the broadest sense’ in Japanese

Posted by Gwen Robinson on Dec 02 09:00.

Some murky subterranean tensions are slowly bubbling to the surface in Tokyo, even as the oddly-mannered slanging match between the central bank and gung-ho ministers of the newish Democratic Party of Japan-led government looks increasingly like an internecine kabuki drama.
At issue first and foremost, is growing pressure on the government to be seen to be doing something — almost anything — to combat deflation and help boost growth; and second, the growing pressure the government is putting on the hapless and reluctant policymakers at the Bank of Japan to deliver the goods.
As the FT reports on Wednesday:
The Bank of Japan announced at a surprise policy board meeting on Tuesday that it would offer up to Y10,000bn ($115bn) in cheap, three-month loans to commercial banks, an easing of monetary policy it said would “firmly support” Japan’s fragile economic recovery. But the BoJ’s attempt to boost liquidity disappointed markets and was dismissed by critics as little more than a sideshow intended to head off calls from members of the new DPJ-led government for more decisive action to curb deflation and boost economic growth.
What we’ve really got here is what Lex so neatly describes as “moral hazard in action”. Japanese finance minister Hirohisa Fujii, (aka the “minister for currency fluctuations“) having observed what a policy of quantitative easing can do to a currency, is keen for Japan to follow the US and UK in cranking up the printing presses.
BoJ governor Masaaki Shirakawa, not to be outdone, has also observed what QE can do to an economy: not a lot, in Japan’s case, in the early noughties. Weeks of briefings and counter-briefings culminated in an unscheduled monetary policy meeting of the BoJ on Tuesday.
The upshot was the BoJ’s cheap-loan programme, which as Bloomberg reported, was characterised on Wednesday as the central bank’s “minimum deflation response” for prime minister Yukio Hatoyama.
What has emerged, as Lex baldly terms it, is “a fudge”. It continues (our emphasis):
The [BoJ] meeting dissolved with a pledge to provide Y10,000bn ($115bn) of short-term funds to commercial banks at a fixed interest rate. To the governor, this probably fits the definition of QE, or ryoteki kanwa, in the broadest sense. But it was less aggressive than the other possible steps such as ramping up outright purchases of long-term government bonds, running at about Y1,800bn a month… Investors, noting a rare invocation of Article 17 of the Bank of Japan Act to call an unscheduled meeting, might have expected something meatier.
Equities rallied a little, while the yen drooped, before paring some of its losses. Markets’ indifference emphasises that the BoJ’s new regime, such as it is, is a half-way house. A more wholehearted implementation of QE can’t be ruled out, with deflation tightening its grip: prices excluding fresh food slid 2.2 percent in October from a year earlier, a near-record drop. Meanwhile, the impression of warring institutions remains. As Barclays Capital notes, Japan’s best chance of persuading its G7 brethren to talk up the dollar is to demonstrate that domestic authorities are on the same page. Tuesday’s odd spectacle hardly helped.
Indeed, the responses from markets, commentators and investors on Wednesday ranged from disappointed to bemused. But many economists concluded that the BoJ — albeit reluctantly — has set the scene to ultimately cave into government pressure and embark on more aggressive forms of QE.
As Glenn Maguire, SocGen’s regional economist, said on Wednesday, it’s really only the “first tentative step by the BoJ to a much more substantive quantitative easing”.
BoJ governor Masaaki Shirakawa admitted as much in comments after Tuesday’s BoJ meeting, saying that “if there is a shortage of liquidity we are prepared to provide more funds”. He also, however, tried to argue that the cheap-loan programme was a form of QE in the “broadest sense”. Err, well, yes…
As Ruixue Xue of RBS Securities Japan remarked in a Wednesday note:
The BoJ governor said “speaking from a broad sense, the measures are quantitative easing.”, and “if necessary we will expand the operation” which is up to JPY10 trn currently. Although the new operation is less aggressive than market expectations, it has likely paved the way for a further easing of monetary policy. In addition, the market has likely already started to price in further steps from the BoJ.
Indeed, he notes, given the dramatic movements over the past days and based on Wednesday’s domestic media reports, it has become clearer that the timing of additional easing measures from the BoJ may now be more firmly in the hands of the government.
The yen, meanwhile, lost some ground against the dollar after Tuesday’s meeting, having rallied to a 14-year high of Y84.81 last week as market turmoil from the fall-out over Dubai’s debt problems fuelled demand for the “safer” haven of the yen. It was trading in early morning Europe time at around Y87.20.
Ultimately, as Tokyo correspondent Mure Dickie noted in the FT’s Money Supply blog, the whole show at the BoJ looks “pretty much like political posturing”.
He concludes (our emphasis):
With Japan’s new Democratic party government under increasing fire for its lack of an obvious economic policy or clear fiscal direction, ministers have been increasingly trying to shift attention over to the BoJ, and in particular to its failure to act decisively against the return of deflation. So Masaaki Shirakawa, BoJ governor, has good reason to want to be seen to do something, even if that something is pretty irrelevant.
The result is an extension of [Tokyo’s] phony war posturing… The question is whether the BoJ’s willingness to respond to pressure on a symbolic level will encourage the politicians to push for more substantive measures. But then it’s not at all clear that there is consensus within the DPJ government on what it actually wants. After all, if it really wanted to change BoJ direction, why would it propose a status quo candidate for the policy board?
Stephen Jen over at BlueGold meanwhile says we are on “yen-intervention watch”. In his latest note, he writes:
In light of the fragile state of the Japanese economy (IP this morning) and the deepening deflationary pressures (headline CPI is now minus-2.50% - the lowest print on record), I suspect the Finance ministry has become more determined to intervene to stabilise expectations on the JPY.
All in all, then, it’s a fun week in Japan, with a lot of space to watch.

Related links:[Wilmot on AV] BoJ on the spot (much) more to do - FT Alphaville
Reserves and reservations - Japan’s QE redux - FT Alphaville
More fun with JGBs, more headaches for Japan - FT Alphaville
Japan, Einhorn and ‘tontine’ fantasies - FT Alphaville