Bank of Japan lifts bond purchases


Japan is co-host of the soccer World Cup, with South Korea, but that too would only deliver a short-term boost

By Alex Frew McMillan
CNN Hong Kong

TOKYO, Japan -- Junichiro Koizumi's package to bail out the Japanese economy failed to deliver, experts say.

But Koizumi got some help when the central Bank of Japan surprised many commentators Thursday by raising its monthly bond purchases to $7.5 billion.

That move was a result of direct pressure from the government, analysts believe. The stock market also welcomed some of the Koizumi administration's proposals.

The Nikkei 225 index closed up 0.14 percent at 10,587.83. It jumped on the BOJ move but fell back swiftly.

The broad Topix index of all section one stocks posted a healthy rise for the day, though, up 0.66 percent at 1,013.80. But it was also lagging toward the close.

Bank stocks made gains on moves to stem short selling, the practice of selling stocks expected to drop, then buying them later.

Experts believe overseas hedge funds have been getting out of some of their short positions in response. That would boost the market, but only very short term.

Another key point of the government's package was to pressure the central Bank of Japan, urging "drastic" measures to help Japan out.

The appeal worked.

The BOJ, which met Thursday for a one-day session of its policy board, surprised most observers by deciding to raise its monthly purchases of Japanese government bonds (JGBs) to 1 trillion yen ($7.5 billion), up from 800 billion yen ($6 billion).

Finance Minister Masajuro Shiokawa had asked the bank for just such a step.

A common tactic

Heaping pressure on the BOJ is a common tactic in Japan, where the government often aims to deflect criticism onto the nominally independent central bank.

Richard Jerram, lead Japan economist for ING Barings, did not expect the tactic to work.

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The Japanese government prepares to announces its anti-deflation package. Grace Chen, economist at the Royal Bank of Scotland, talks to Richard Quest.

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"The government has failed to come up with any significant measures in its deflation package," he told CNN earlier on Thursday.

"I don't think that the BOJ is going to take all of the responsibility onto itself and try to solve Japan's problems through monetary policy."

Still, the BOJ was virtually obliged to respond to the government package, even though it has taken a similar step in the past, to no avail.

J.P. Morgan economist Ryo Hino told CNN just before the BOJ's decision: "The 'X factor' for us is really how sensitive are the BOJ board members to the government pressure to do something."

Despite government claims that the administration and the BOJ are cooperating, experts say the BOJ is likely frustrated by the government's inaction.

Japan watchers weren't expecting much from the government package released Wednesday night. They are sanguine about why the government is not rushing to help Japan out of its third recession in a decade, and the harshest.

Though overseas investors have been clamoring for action, pressure may be too intense on the domestic political front for Koizumi to propose radical steps.

"It seems to me that the domestic vested interests are so strong in opposing a resolution of the problem, they far outweigh the impact of foreign criticism," Jerram said.

A series of short-term measures

The Koizumi cabinet unveiled its long awaited proposal to combat deflation on Wednesday evening.


BOJ Govenor Masaru Hayami and the policy board decided to lift monthly bond purchases Thursday

It did not differ substantially from leaked draft versions.

The package was billed as a way of combating the deflation currently plaguing Japan.

But Hino believes it was in fact a stimulus plan, without the state spending of past efforts.

"This is not a deflation package. It should really be seen as a hodge podge of remedies to deal with the current danger, which is a financial crisis," he said.

"It's a short-term remedy. The government can really only see a few meters in front of them, basically," he said.

"They're putting out all these measures to deal with the matters at hand, which is what they always do. They put off matters so long that all they can do is deal with the matters at hand."

The package did break with past attempts to help out Japan, by avoiding public spending. Still, critics say the steps it did take, to press banks to write off bad loans, prop up stocks and the like, are unlikely to work beyond the short-term.

Poor production figures

After some disappointing retail sales figures on Wednesday, Japan got another jolt of bad news on Thursday.

Industrial production fell 1.0 percent over the prior month, when seasonally adjusted. That was well beyond the 0.7 percent drop that analysts expected.

There are signs, however, that the Japanese economy may be bottoming out. The level of inventories � or the "inventory ratio" � fell sharply, down 4.8 percent.

That means Japanese companies are working off the backlog of goods they have built up as demand lagged. Economists have said production will not pick up until the backlog drops.

The Ministry of Economy, Trade and Industry, which compiles the figures, also forecasts a rise in industrial production in February and in March.