Japanese central bank may leave rate unchanged and recovery weakens

09-18-2009 11:22

The central bank of Japan will probably remain the benchmark interest rate close to 0% this Wednesday as it also will continue the emergency lending programs due to the economic improvement losing steam. A survey among 23 economists demonstrates that Masaaki Shirakawa, governor of the Bank of Japan, will remain the overnight lending rate at 0.1%. The Bank of Japan will not reveal future policy measures as it already prolonged the programs that aim on credit easing until the end of 2009.

Recovery weakens

The recovery of the world’s second-largest economy could be weakening, proved by companies reducing spending and sacking employees. The central bank’s governor stated on August 31 that he is not convinced that the recovery is sustainable after incentive measures expire and companies complete the replenishment of their stocks.
Yasunari Ueno, head market economist at Mizuho Securities, commented: “The recent economic improvement is stimulated by unsustainable forces and the Japanese government is running out of options regarding further monetary and fiscal policy measures. Bank of Japan officials seem to agree that it’s too late to unwind their unusual measures.”
The Japanese economy expanded 2.3% on a yearly basis in the second quarter, which is the first economic growth in more than twelve months, boosted by government spending in Japan and outsight the nation. July’s unemployment climbed to a record level of 5.7%, as both consumer prices and machinery orders fell by an unprecedented 2.2%, while household demand also dropped.

Too weak

Monitoring the global economy remains the main priority of policy makers worldwide. Ben Shalom Bernanke, the current chairman of the board of governors of the Federal Reserve, stated that the economic improvement in the US could be too weak to diminish the jobless rate swiftly, while he believes that the country has probably left the most intense slump behind. G-20 officials mentioned earlier this month that it’s too early to retrieve fiscal measures that represent a value of more than $2 trillion and increase record-low interest rates.

Japanese central bank

The Bank of Japan started to purchase corporate debt from lenders and began to channel funds to companies by providing them unrestricted loans pledged by security, after the most recent rate reduction at the end of 2008. The policy board stated that credit conditions remain “restricted” as they decided to prolong the programs until December 31 at the assembly in July.
Japan’s central bank could at least affirm the renewed expansion by a more optimistic economic evaluation, while last month’s assessment proved that it had “ended its deterioration.”
Mari Iwashita, head market economist at Daiwa Securities SMBC, commented: “It is expected that the Japanese central bank considers a more optimistic tone as they continue its very reserved expression regarding the economic forecast, despite the fact that the economy seems to recover.”

Government bonds

The new administration, led by Yukio Hatoyama, could also pressure the Bank of Japan to continue the low yields by purchasing more government securities from lenders, according to economists. The new government could be forced to sell debt in order to finance the farmers and household support, which was pledged during the elections.
Seiji Shiraishi, head economist at HSBC Securities Japan, stated: “In essence the ruling Democratic Party of Japan (DPJ) will intent to maintain the Bank of Japan’s independency. However, the administration may urge the central bank to raise the acquisition of government securities when they intent to finance their promises by selling-off debts.”
The Bank of Japan currently purchases ¥1.8 trillion ($20 billion) of bonds every month.