Bank of Japan braced to stabilize markets

By Michiyo Nakamoto, FT.com
March 13, 2011 -- Updated 1646 GMT (0046 HKT)


Tokyo (FT) -- The Bank of Japan will act quickly to stabilize the markets and the banking system when its monetary board meets on Monday.

Bank of Japan Governor Masaaki Shirakawa said on Sunday the central bank would provide huge amounts of liquidity to the banking system, reinforcing the bank's determination to keep markets stable in the wake of the devastating earthquake that struck northeastern Japan.The BoJ is likely to provide Y2000bn-Y3000bn ($24.4bn-$36.6bn) in funds through its market operations Monday morning, two to three times the normal amount, to soothe markets and keep short-term borrowing costs from spiking, Reuters reported.

Economics Minister Kaoru Yosano said the government would fight decisively against speculative moves and would not tolerate short selling to take advantage of the quake."We will monitor market conditions and plan to provide markets with a lot of liquidity first thing tomorrow morning," Shirakawa said after attending a meeting of cabinet ministers.

The central bank's first priority is to ensure banks in the worst-affected regions do not run out of cash by extending loans at favorable conditions.

Over the weekend it provided Y55bn ($671.5mn) in funds to financial institutions in quake-struck northern Japan.

The Japanese government faces an enormous challenge coming up with funds to finance the massive rescue and rebuilding efforts that will be required in the aftermath of the disaster.

Japan's public debt is approaching 200 percent of gross domestic product and the government has called for an increase in the consumption tax to offset falling tax revenues.

Before the earthquake hit the country, the ruling Democratic party of Japan had been struggling to pass bills related to the 2011 budget.

The government will put together an emergency supplementary budget, as it has done many times in the past to deal with crises.

Finance minister Yoshihiko Noda on Saturday appealed to opposition parties to co-operate in first passing the budget for fiscal 2011, after which the government aims to pass a supplementary budget to help rebuild the country.

Mr. Noda said the government had just Y200bn ($2.4bn) in reserve funds for 2010 and, together with Prime Minister Naoto Kan, called for a supplementary budget to help severely destroyed areas and help people affected by the crisis to rebuild their lives.

Although the central bank is not expected to cut its policy rate, which it has cut to a historic low of zero, in order to combat deflation, it is likely to signal its readiness to ease monetary policy to ensure damage from the quake does not threaten the country's fragile economic recovery.

Takahide Kiuchi, economist at Nomura, said the BoJ was likely to increase its asset-buying program from about Y5,000bn ($61bn) to between Y8,000bn ($97.6bn) and Y10,000bn ($122bn).

In an attempt to support economic activity, the BoJ has been buying assets, including real estate investment trusts.

The economic impact of the latest disaster to hit Japan is widely expected to be as severe, or worse, than that following the Hanshin-Awaji earthquake, which devastated Kobe and the city's surrounding region.

At that time, the government put together emergency spending packages totaling Y3,000bn ($36.6bn), notes Mr. Kiuchi.

© The Financial Times Limited 2011