BOJ holds fire and says boosting asset buying an option

By Leika Kihara

TOKYO (BestGrowthStock) – The Bank of Japan held fire on policy on Thursday, but said boosting its 5-trillion-yen ($61 billion) asset buying plan was a “strong option” if the outlook for the economy sharply deteriorated.

The BOJ brought forward its next policy review to November 4-5, right after the U.S. Federal Reserve meets, which markets took as a sign it was ready to act swiftly if the outcome of the Fed’s November 2-3 meeting triggered heavy dollar selling.

Governor Masaaki Shirakawa said, however, the change of the date from the originally planned mid-November had nothing to do with the Fed and aimed at speeding up the roll-out of the bank’s asset buying plan, particularly purchases of less conventional instruments.

“If there is a big change in our economic and price outlook, expanding it is a strong option,” Shirakawa told reporters when asked whether the BOJ would top up its asset purchases.

The BOJ unveiled the scheme early this month when it also pegged its benchmark rate at 0-0.1 percent and vowed to keep it near zero until the end of deflation was in sight.

Its updated price and growth forecasts were slightly more optimistic than markets had expected, but still showed it could take perhaps two years before prices started rising at a pace the BOJ wants to see before lifting rates.

While new economic powers such as China, India and Brazil have swiftly recovered from the global financial crisis and the economic slump that followed, Japan, the United States and other rich nations have struggled to sustain economic growth.

Furthermore, the side effects of the trillions of dollars they spent on economic stimulus and record low lending rates have aggravated strains in currency markets, fuelling fears of currency and trade wars.

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On Thursday, the BOJ fleshed out its asset purchasing plan under which it will kick off with buying of government debt next month with purchases of corporate bonds and commercial paper possibly following in December.

The Fed is expected to extend its government bond buying scheme to prop up the sputtering U.S. economy next week.

The prospect of more dollars flowing into markets has driven the U.S. currency to near record lows against the yen, prompting Japanese exporters such as Toyota and Nissan to talk of a looming crisis.

Speculation that the U.S. central bank will opt for piecemeal fund injections rather than a big-bang operation has given the dollar some respite, but a more aggressive action could knock it down again and force the BOJ’s hand.

“I think the BOJ will try to do something to reduce the negative impact from additional money-easing by the U.S.,” said Hideo Kumano, chief economist at Dai-ichi Life Research Institute. “I assume the BOJ will expand the amount of asset purchases after the FOMC.”

Sources familiar with the BOJ’s thinking have said that by speeding up the spending plan’s roll-out the central bank may find it easier to justify boosting the scheme as early as next month in case the yen shoots up toward record highs.

The yen took the BOJ’s decision in stride, trading little changed around 81.60 to the dollar after the announcement. The Nikkei average briefly turned positive before retreating to end slightly lower, while government bond futures rose 0.27 point on the day.

In its twice-yearly economic report, the BOJ cut its growth forecast for the fiscal year to March 2012 to 1.8 percent from the 1.9 percent predicted three months ago, less than markets had expected.

It also predicted prices would inch up 0.1 percent in the next fiscal year and 0.6 percent thereafter, prompting some analysts to wonder whether the central bank was too optimistic.

“Given the recent yen strengthening, the BOJ’s median CPI forecast of 0.1 percent for fiscal 2011/12 seems a bit strange,” said Naomi Hasegawa, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities.

“If prices undershoot the BOJ’s forecast, the central bank may be pushed into taking more unconventional steps.”

Shirakawa said the BOJ’s latest forecasts took into account the expected positive effects from its just-announced monetary easing, which may explain why they were more upbeat than private projections.

Detailing its asset buying plan, the central bank said it would buy 1.5 trillion yen in long-term government bonds and 2 trillion yen in short-term government securities.

It also plans to spend 1 trillion yen on commercial paper and corporate debt, as well as up to 450 billion yen on ETFs and 50 billion on J-REITs.

(Additional reporting by Kaori Kaneko, Rie Ishiguro, Tetsushi Kajimoto and Stanley White; Writing by Tomasz Janowski; Editing by Kazunori Takada)

BOJ holds fire and says boosting asset buying an option