Yen drops as Japan acts to stimulate growth
THE yen fell to a one-month low against the dollar yesterday after the Bank of Japan (BOJ) unexpectedly expanded its asset-purchase fund by ¥10-trillion ($126bn), seeking to counter an increasing danger of contraction in the world’s third-largest economy.
The BOJ’s move encouraged investors to take more risk. This nudged the euro higher against the dollar before it succumbed to fresh profit-taking. Talk of a European central bank diversifying out of the euro also weighed on the currency.
The Nikkei 225 stock average closed yesterday at its highest level since May, and stocks in Europe halted a two-day decline after the BOJ’s announcement.
The yen lost 0.3%, trading at 79.02 in Tokyo, about 5% down from the postwar high reached in October last year. Yields on benchmark 10-year government bonds fell 0.005 of a percentage point, to 0.810%.
The BOJ’s programme, in which it buys mainly government debt, or JGBs, was enlarged to ¥55-trillion, the bank said in Tokyo. Governor Masaaki Shirakawa said the bank also will abandon minimum yields for ¥1.8-trillion in monthly government-bond purchases conducted separately from the stimulus fund, opening the door to the possibility of negative rates.
Global central banks are continuing to loosen policy. The BOJ’s move came a week after the US Federal Reserve voted to extend its quantitative-easing programme. The European Central Bank has agreed to buy the bonds of governments that accept austerity conditions to tame the euro turmoil, and Bank of England policy makers voted 9-0 last week to keep their bond purchase target at £375bn.
The Bank of China has held policy firm, counting on the Federal Reserves action s to provide the stimulus China needs.
The decision to purchase JGBs without regard to yield should have an impact on financial markets, Mr Shirakawa told reporters yesterday.
The so-called Rinban operations were maintained at ¥1.8-trillion a month. Mr Shirakawa said policy makers will closely monitor the effect of yen strength. In its unanimous policy decision, the BOJ kept the benchmark interest rate between zero and 0.1% and maintained a separate fund that extends credit to banks at ¥25-trillion. The bank downgraded its economic assessment, saying growth had "come to a pause" while overseas economies had moved "somewhat deeper into a deceleration phase".
Finance Minister Jun Azumi said yesterday’s easing was bolder than expected and "very much welcomed" by the government, after calls from some legislators for the BOJ to do more to spur growth and counter entrenched deflation.
Nuclear plant shutdowns, weakness in exports, tensions with China and the risk the government will run out of money because of a parliamentary deadlock over financing are challenges for an economy that contracted last year after an earthquake and tsunami. Prime Minister Yoshihiko Noda said last week that an extra budget will be needed.
JPMorgan Securities, Credit Suisse Group and BNP Paribas expect Japan’s economy to contract this quarter after growth slowed to a 0.7% annual pace in the previous three months. The expansion was 5.3% in the first quarter.
"Further easing is still possible this year because the BOJ is emphasising uncertainties in its outlook," said Masamichi Adachi, a senior economist at JPMorgan Securities in Tokyo.
The euro erased earlier gains against the yen. The single currency was down 0.4% on the day at ¥102.47, well below an earlier high of ¥103.63. Its drop against the yen saw it cut earlier gains versus the dollar. Given that the euro had rallied about 9% since late July, traders said the pullback reflected some mild profit-taking as markets waited to see whether Spain would apply for aid and trigger the ECB’s bond-buying programme.
Spanish Deputy Prime Minister Soraya Saenz de Santamaria said on Tuesday the government was still considering the terms of a bail-out.
The euro was expected to remain broadly in favour, however, as the ECB’s plans to tackle the debt crisis have encouraged investors to pare their aggressive short positions.