As widely expected, the Bank of Japan (BoJ) left its leading O/N target rate unchanged at 0.1% in a unanimous decision. In addition, it announced it will start purchasing corporate bonds and extended most of its existing programmes to ease corporate finance conditions and liquidity in financial markets. At the press briefing, Board Governor Shirakawa said that cutting its leading interest rates to zero was not even discussed at this week's meeting, indicating that a cut in the O/N target rate all the way to zero is unlikely.

Details: BoJ's view of the economy was left largely unchanged. It main scenario remains that the economy will continue to deteriorate in the short term and start to recover in late 2009. BoJ expects inflation to temporarily turn negative during the spring, but it still expects it to return into positive territory in 2010. BoJ regards risks to this scenario to be overwhelmingly on the downside on both growth and inflation.

As mentioned above BoJ also announced several new unconventional easing measures and extended most of the existing ones. Most of the existing programmes were originally intended only to provide liquidity through the fiscal year-end (March 31).

  • BoJ will start purchasing corporate bonds outright in the market. The programme will last until September 30, 2009, and total purchase of corporate bonds must not exceed JPY1trn. Eligible corporate bonds should be rated A or higher and the residual maturity for the corporate bond must not exceed one year.
  • The Special Funds-Supplying Operations (SFSO) facility has been extended. This facility allows financial institutions to borrow unlimited funds at the BoJ at a fixed rate (effectively the O/N target rate, currently 0.1%) against eligible collateral. Liquidity through this provision will now be provided once a week (previously twice a month) and more importantly the duration of loans will be extended to three months (from one to three months previously). By extending the duration of loans in the SFSO facility, BoJ hopes it will be able to push down money market interest rates with longer maturity.
  • Finally, most of the extraordinary measures introduced during the past year were extended. This includes outright purchase of commercial papers (extended to September 30 from March 31), USD fund supplying operations (extended to October 30 from April 30) and the Complementary Deposit Facility (extended to October 15 from April 30). The Complementary Deposit Facility pays a 0.1% interest rate on banks' excess reserves and effectively puts a floor under the O/N interest rates at 0.1%.

Outlook: We are not sure that today's measures from BoJ will make much of a difference for the economy. They are small and cautious steps in the right direction, but should be regarded mostly as damage control unlikely to be a significant boost to domestic demand. Japan's main problem is weaker external demand (not a domestic credit crunch) and the government's inability to respond appropriately fiscally because of the current political stalemate. Thus a recovery in Japan will be dependent on global recovery. Hence, the leading interest rate is likely to remain unchanged at 0.1% until at least H2 10. Without an appropriate fiscal response, there will be increasing pressure on BoJ to accelerate is non-conventional easing measures further.

Impact: Today's measures from BoJ were widely expected and, if anything, some in the market probably expected something more aggressive in light of the recent very bad figures. Hence, the initial market reaction was slightly stronger JPY and slightly higher bond yields. The extension of maturities on the SFSO should help push longer-term interest rates on the money market down.


Danske Bank


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