Japan Steps Up Quantitative Easing to Fight Deflation

This week, rising deflation risk and strong Yen hurting Japanese economy had forced Bank of Japan to revised its exit strategy for quantitative easing policy pledged at the end of October. At emergency meeting the institution introduced a new funds-supplying operation to encourage a further decline in longer-term interest rate

Indeed, a lending facility of 10 trillion yen providing three-month loans at fixed interest rates of 0.1% with eligible collateral of Japanese government securities, corporate bonds, commercial paper and loans on deeds is expected to boost bank lending which has slowed for ten straight months. In addition, by lowering three months rate, below comparable United States rates the authorities are looking for weakening the yen against major currencies.

Bank of Japan Statement
Enhancement of Easy Monetary Conditions

1. At the unscheduled Monetary Policy Meeting held today, the Policy Board of the Bank of Japan decided to further enhance easy monetary conditions by introducing a new funds-supplying operation to encourage a further decline in longer-term interest rates.

2. While Japan's economy is picking up, there is not yet sufficient momentum to support self-sustaining recovery in business fixed investment and private consumption. As for the outlook, the pace of economic improvement is likely to remain moderate until around the middle of fiscal 2010. On the price front, downward pressures on prices are expected to remain even after the year-on-year decline in the CPI (excluding fresh food) becomes fairly moderate toward the beginning of next year. On the financial front, corporate finance, with some lingering severity, has continued to show signs of improvement. However, there is a risk that recent international financial developments and foreign exchange market instability
might pose adverse effects on economic activity through impacts on business sentiment and others, and this warrants attention.

3. The Bank has judged that, in supporting the economic recovery from the financial side, it is most effective at present to further spread the strong effects of monetary easing and encourage a further decline in longer-term interest rates in the money market through provision of ample
longer-term funds at an extremely low interest rate. Therefore, the Policy Board of the Bank of Japan decided, by a unanimous vote,1 to introduce a new funds-supplying operation as follows.
a. Loan rate: Fixed interest rate (the target for the uncollateralized overnight call rate: 0.1 percent).
b. Duration: Three months.
c. Collateral: Any eligible collateral for the Bank's funds-supplying operations, such as Japanese government securities, corporate bonds, CP, and loans on deeds (pooled collateral).

4. The Policy Board of the Bank of Japan decided, by a unanimous vote, to set the following guideline for money market operations for the intermeeting period: The Bank of Japan will encourage the uncollateralized overnight call rate to remain at around 0.1 percent.

5. The Bank believes that the decision made today, together with the government's efforts, will firmly support Japan's economic developments toward recovery.

6. The Bank recognizes that it is a critical challenge for Japan's economy to overcome deflation and return to a sustainable growth path with price stability. To this end, the Bank will continue to do its utmost as central bank.

TradingEconomics.com, Bank of Japan
12/3/2009 1:19:03 PM