BOJ Follows Fed to Bolster Stimulus as Economic Recovery Falters

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BOJ Follows Fed to Bolster Stimulus as Economic Recovery Falters

By Toru Fujioka - Sep 19, 2012 12:48 PM GMT+0900

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The Bank of Japan expanded its easing program in an effort to prevent a rising yen from undermining an economic recovery, following measures from the U.S. Federal Reserve last week to stimulate growth.

The central bank increased its asset-purchase fund to 55 trillion yen ($697 billion) from 45 trillion yen and its lending facility was kept at 25 trillion yen, according to a statement released in Tokyotoday. Five of 21 analysts surveyed by Bloomberg News predicted easing while 11 forecast the action by October.

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The Bank of Japan headquarters stands in Tokyo, Japan. Photographer: Tomohiro Ohsumi/Bloomberg

The world’s third-largest economy grew at half the pace initially estimated in the second quarter, highlighting a contraction risk worsened by Japanese factories in China shuttering amid a territorial dispute. The Fed’s open-ended plan to buy mortgage-backed securities pressured the BOJ to act to avoid further yen appreciation, according to BNP Paribas SA economist Ryutaro Kono.

“When the Fed makes a significant move, the BOJ has no choice but to follow,” Kono said before the BOJ meeting. “It’s hard for the BOJ to just sit and watch further yen appreciation.”

The central bank kept its benchmark interest rate between zero and 0.1 percent and monthly bond purchases at 1.8 trillion yen. The BOJ’s main policy tool has been purchasing financial securities ranging from government debt to exchange-traded funds to bolster growth.

Economic Assessment

Twelve of the 21 economists surveyed expected Governor Masaaki Shirakawa’s board to downgrade its economic assessment today. The central bank said “economic activity has started picking up moderately” in a statement on Aug. 9.

The yen was at 78.62 per dollar at 11:17 a.m. in Tokyo. The Nikkei 225 Stock Average was up 0.3 percent. Benchmark 10-year bond yields were at 0.805 percent.

JPMorgan Securities, Credit Suisse Group AG and BNP Paribas expect Japan’s economy to contract this quarter after it slowed to a 0.7 percent annual pace in the three months ended on Jun 30 after expanding 5.3 percent in the January to March period.

Prime Minister Yoshihiko Noda said last week he will have to compile an extra budget to support a recovery from the March 2011 earthquake, even as he is struggling to pass a bill to allow the sale of 38 trillion yen of bonds to fund spending for the rest of this year’s primary budget.

Japan’s weakening recovery faces an added threat from a territorial dispute with China, Japan’s biggest export market. Toyota Motor Corp., Honda Motor Co. and Nissan Motor Co., halted production at some plants in China while Panasonic Corp. reported damage to a factory. Thousands marched in anti-Japanese protests in dozens of cities yesterday.

Fed Action

The yen strengthened to a seven-month high of 77.13 per dollar on Sept. 13, after the Fed announced its plan to buy $40 billion a month of mortgage debt in a third round of quantitative easing. The yen has gained about 48 percent in the past five years, eroding exporters’ profits.

“We are concerned about an increase in the speed of yen appreciation, and our sense of crisis is intensifying,” Akio Toyoda, chairman of the Automobile Manufacturers Association and chief executive officer of Toyota, said in a statement on Sept. 14. “We strongly hope the government and the BOJ can cooperate closely and act swiftly to correct a historically strong yen level.”