TOKYO Japan promised a host of measures on Monday in a bid to ignite its faltering economy and temper a punishingly strong yen.
Prime Minister Naoto Kan proposed new stimulus steps while the Bank of Japan under pressure from the government further eased its already easy monetary policy.
But analysts called the measures too timid in the face of the problems plaguing Japans export-oriented economy. A yen that has paradoxically surged to 15-year highs despite weaknesses in the countrys economy coupled with the damaging phenomenon of falling prices known as deflation continues to hinder hopes of a strong recovery analysts said.
The proposals however had little effect on the currency markets where the yen strengthened again Monday. The yen rose to 84.67 against the dollar.
There seems to be a sense of fatalism. The B.O.J. continues to play the same old game of making incremental but ultimately meaningless policy changes in response to political pressure" said Richard Jerram economist for Japan at the global investment bank Macquarie.
The government talks of the need for fiscal reconstruction but then tries to construct an economic stimulus package with tiny fiscal measures and minor uncoordinated structural reforms" Mr. Jerram said. Intervention in the currency markets looks necessary but is absent" he said. Japan has not intervened in currency markets since 2003-4 when the finance ministry sold 35 trillion yen for dollars.
Some analysts said that the latest government moves appeared symbolic a stand by Prime Minister Kan to show that he was addressing the strengthening yen when his leadership was in question.
At party elections next month Mr. Kan will face a challenge from one of his lieutenants the longtime lawmaker Ichiro Ozawa.
Though Mr. Ozawa appears to be unpopular with the public he faces a criminal investigation into a political financing scandal he is credited within the ruling Democratic Party with engineering its victory in elections last year and still commands a large following.
Mr. Ozawas reputation as a proponent of more government spending something Mr. Kan a relative fiscal hawk has been averse to could be spurring the prime minister to instead lean on the Bank of Japan to do more to prop up the economy. Mr. Ozawa has been critical of Mr. Kan for his handling of the economy.
The infighting brings another layer of uncertainty to Japans economic outlook analysts said.
Given the very fluid political situation at present including the possibility of political realignment it is hard to forecast just what impact the outcome of the leadership election will have on the direction of longer-term economic policy" Takahide Kiuchi an economist at the Financial and Economic Research Center at Nomura Securities said in a report late Monday.
A global economic crisis led Japan to its worst recession in decades and the countrys recovery has looked increasingly shaky. Figures released in August showed that Japans economy grew 0.1 percent in the April-June quarter.
A jump in the value of the yen to 15-year highs has hampered exports which are responsible for much of Japans growth by making them more expensive.
Disappointing Japans exporters Mr. Kan was silent on whether Japan would intervene directly in international currency markets to help weaken the yen.
Though such a move could cap the yens rise in the short term intervention by Japan alone is not expected to do much to weaken the currency in the longer term especially because Tokyo is unlikely to find much support from other big currency players like the United States or the European Union both of which are quite happy for Japanese exports to stay uncompetitive.
Still Mr. Kan said at a meeting with lawmakers Monday that the government and central bank working in tandem was a step forward toward recovery.
The two pillars of economic policy and the Bank of Japans new monetary measures will enable us to respond speedily" Mr. Kan said.
The Bank of Japan announced Monday after an emergency meeting that it would expand the volume of money available to banks under a special fixed rate to 30 trillion yen ($351 billion) up from 20 trillion yen. It also introduced a six-month loan facility on top of a three-month program already in place all steps aimed at raising the supply of loans to banks. The central banks board voted to leave its main overnight target rate at 0.1 percent.
Apart from easing the yens rise the measures are intended to help Japans economy by increasing the supply of money and encouraging banks to lend more. But years of economic stagnation in Japan have sapped demand for loans from companies and consumers despite rock-bottom interest rates which has fueled deflation a general decline in prices that eats into profit and wages.
The bank also indicated that it had downgraded its assessment of the economy citing volatile foreign exchange markets and uncertainty over the economic health of major trading partners like the United States a move that could pave the way for more steps to ease monetary policy.
But markets were disappointed: anticipation of decisive action had sent Japans Nikkei index up more than 3 percent early Monday but stocks surrendered almost half of the gains after the banks announcement. The Nikkei ended 1.76 percent higher at 9149.26.
Analysts say that though the banks options are running out there are still steps it could take to help the economy. It could cut its main interest rate from 0.1 percent to zero percent increase its purchase of Japanese government bonds or buy other assets.
Some opposition lawmakers have called for an inflation target to raise expectations among investors that the bank will keep monetary policy easy until Japan sees inflation of 1 to 2 percent. Still the governor of the Bank of Japan Masaaki Shirakawa defended the banks steps calling them timely and effective and warned against too much monetary easing.
We engaged in further monetary easing to deal with the risks of a downturn in a pre-emptive accelerated manner" Mr. Shirakawa said after the announcement. Currently interest rates are low and near zero. We need to carefully examine the drawbacks when considering cutting interest rates further."
Meanwhile Prime Minister Kan outlined a stimulus package of 900 billion yen ($10.8 billion) about 0.2 percent of Japans gross domestic product aimed at beating deflation protecting jobs and bolstering domestic investment and consumer spending. Because the amount had already been incorporated into the governments 2010 budget as emergency funds economists did not expect much of an impact.
This is indeed a small stimulus. But it is even smaller than it appears since it is being cobbled together out of unspent money from the current budget" William Grimes a professor in Japanese political economy at Boston University wrote in an e-mail. In other words there is literally no new money."
The government plan extends a subsidy program that has spurred sales of eco-friendly electrical appliances as well as low-interest housing loans for energy-efficient homes. To help young people find jobs the plan calls for more career counselors at colleges and internship opportunities at corporations. To discourage companies from moving overseas the plan offers technological and financial support for small and medium-size businesses. The government also calls for deregulation in sectors like energy health care and tourism.
Analysts said the stimulus plan did not address fundamental weaknesses in Japans economy.
In a note to clients Masaaki Kanno economist at JPMorgan Securities Japan said the country still struggled to break free of a vicious cycle in which a strong yen hurts corporate profit worsens deflationary expectations raises real interest rates and in turn further strengthens the yen.
Japans economy is in a trap" Mr. Kanno said.
TOKYO Japan promised a host of measures on Monday in a bid to ignite its faltering economy and temper a punishingly strong yen.
Prime Minister Naoto Kan proposed new stimulus steps while the Bank of Japan under pressure from the government further eased its already easy monetary policy.
But analysts called the measures too timid in the face of the problems plaguing Japans export-oriented economy. A yen that has paradoxically surged to 15-year highs despite weaknesses in the countrys economy coupled with the damaging phenomenon of falling prices known as deflation continues to hinder hopes of a strong recovery analysts said.
The proposals however had little effect on the currency markets where the yen strengthened again Monday. The yen rose to 84.67 against the dollar.
There seems to be a sense of fatalism. The B.O.J. continues to play the same old game of making incremental but ultimately meaningless policy changes in response to political pressure" said Richard Jerram economist for Japan at the global investment bank Macquarie.
The government talks of the need for fiscal reconstruction but then tries to construct an economic stimulus package with tiny fiscal measures and minor uncoordinated structural reforms" Mr. Jerram said. Intervention in the currency markets looks necessary but is absent" he said. Japan has not intervened in currency markets since 2003-4 when the finance ministry sold 35 trillion yen for dollars.
Some analysts said that the latest government moves appeared symbolic a stand by Prime Minister Kan to show that he was addressing the strengthening yen when his leadership was in question.
At party elections next month Mr. Kan will face a challenge from one of his lieutenants the longtime lawmaker Ichiro Ozawa.
Though Mr. Ozawa appears to be unpopular with the public he faces a criminal investigation into a political financing scandal he is credited within the ruling Democratic Party with engineering its victory in elections last year and still commands a large following.
Mr. Ozawas reputation as a proponent of more government spending something Mr. Kan a relative fiscal hawk has been averse to could be spurring the prime minister to instead lean on the Bank of Japan to do more to prop up the economy. Mr. Ozawa has been critical of Mr. Kan for his handling of the economy.
The infighting brings another layer of uncertainty to Japans economic outlook analysts said.
Given the very fluid political situation at present including the possibility of political realignment it is hard to forecast just what impact the outcome of the leadership election will have on the direction of longer-term economic policy" Takahide Kiuchi an economist at the Financial and Economic Research Center at Nomura Securities said in a report late Monday.
A global economic crisis led Japan to its worst recession in decades and the countrys recovery has looked increasingly shaky. Figures released in August showed that Japans economy grew 0.1 percent in the April-June quarter.
A jump in the value of the yen to 15-year highs has hampered exports which are responsible for much of Japans growth by making them more expensive.
Disappointing Japans exporters Mr. Kan was silent on whether Japan would intervene directly in international currency markets to help weaken the yen.
Though such a move could cap the yens rise in the short term intervention by Japan alone is not expected to do much to weaken the currency in the longer term especially because Tokyo is unlikely to find much support from other big currency players like the United States or the European Union both of which are quite happy for Japanese exports to stay uncompetitive.
Still Mr. Kan said at a meeting with lawmakers Monday that the government and central bank working in tandem was a step forward toward recovery.
The two pillars of economic policy and the Bank of Japans new monetary measures will enable us to respond speedily" Mr. Kan said.
The Bank of Japan announced Monday after an emergency meeting that it would expand the volume of money available to banks under a special fixed rate to 30 trillion yen ($351 billion) up from 20 trillion yen. It also introduced a six-month loan facility on top of a three-month program already in place all steps aimed at raising the supply of loans to banks. The central banks board voted to leave its main overnight target rate at 0.1 percent.
Apart from easing the yens rise the measures are intended to help Japans economy by increasing the supply of money and encouraging banks to lend more. But years of economic stagnation in Japan have sapped demand for loans from companies and consumers despite rock-bottom interest rates which has fueled deflation a general decline in prices that eats into profit and wages.
The bank also indicated that it had downgraded its assessment of the economy citing volatile foreign exchange markets and uncertainty over the economic health of major trading partners like the United States a move that could pave the way for more steps to ease monetary policy.
But markets were disappointed: anticipation of decisive action had sent Japans Nikkei index up more than 3 percent early Monday but stocks surrendered almost half of the gains after the banks announcement. The Nikkei ended 1.76 percent higher at 9149.26.
Analysts say that though the banks options are running out there are still steps it could take to help the economy. It could cut its main interest rate from 0.1 percent to zero percent increase its purchase of Japanese government bonds or buy other assets.
Some opposition lawmakers have called for an inflation target to raise expectations among investors that the bank will keep monetary policy easy until Japan sees inflation of 1 to 2 percent. Still the governor of the Bank of Japan Masaaki Shirakawa defended the banks steps calling them timely and effective and warned against too much monetary easing.
We engaged in further monetary easing to deal with the risks of a downturn in a pre-emptive accelerated manner" Mr. Shirakawa said after the announcement. Currently interest rates are low and near zero. We need to carefully examine the drawbacks when considering cutting interest rates further."
Meanwhile Prime Minister Kan outlined a stimulus package of 900 billion yen ($10.8 billion) about 0.2 percent of Japans gross domestic product aimed at beating deflation protecting jobs and bolstering domestic investment and consumer spending. Because the amount had already been incorporated into the governments 2010 budget as emergency funds economists did not expect much of an impact.
This is indeed a small stimulus. But it is even smaller than it appears since it is being cobbled together out of unspent money from the current budget" William Grimes a professor in Japanese political economy at Boston University wrote in an e-mail. In other words there is literally no new money."
The government plan extends a subsidy program that has spurred sales of eco-friendly electrical appliances as well as low-interest housing loans for energy-efficient homes. To help young people find jobs the plan calls for more career counselors at colleges and internship opportunities at corporations. To discourage companies from moving overseas the plan offers technological and financial support for small and medium-size businesses. The government also calls for deregulation in sectors like energy health care and tourism.
Analysts said the stimulus plan did not address fundamental weaknesses in Japans economy.
In a note to clients Masaaki Kanno economist at JPMorgan Securities Japan said the country still struggled to break free of a vicious cycle in which a strong yen hurts corporate profit worsens deflationary expectations raises real interest rates and in turn further strengthens the yen.
Japans economy is in a trap" Mr. Kanno said.
