The Bank of Japan buckled under government pressure and eased monetary policy at an emergency meeting on Monday in an effort to curb a rise in the yen that is threatening a fragile economic recovery.
The yen bounced back to day highs after the central bank expanded a scheme supplying cheap fixed-rate loans to banks, a move seen by investors as a symbolic gesture that will do little to halt the currency's climb that hurts exports and may prolong deflation.
"Today's move is not a bold move," said Simon Wong, regional economist at Standard Chartered Bank in Hong Kong. "If the yen continues to appreciate, say it appreciates beyond the 80 level, that could trigger more direct intervention at some point. We cannot rule out a direct intervention at this point."
The decision follows weeks of efforts by Tokyo's policymakers to talk down the yen, signalling the possibility of intervening in the market after the Japanese currency hit a 15-year high of 83.58 yen against the dollar last week. The government had also heightened pressure on the BOJ to do its part.
The central bank said that by increasing the volume and duration of funds made available to banks it aimed to lower money market interest rates — something that in the past also helped ease the upward pressure on the yen.
Although Japanese nominal interest rates are at rock bottom, deflation has boosted real rates, deterring investment and driving up the yen as overseas investors seek real yields that are higher than those in other major economies.
PM KAN KEEN TO LOOK ACTIVE
The yen's rebound pulled the Nikkei share average off its peaks and helped Japanese government bond futures bounce back from an early plunge.
Prime Minister Naoto Kan, whose Democratic Party swept to power a year ago but was thrashed in a July upper house poll, is keen to show that he is doing something about the economy ahead of a challenge from powerbroker Ichiro Ozawa in a September 14 party leadership vote that could split the party.
Kan was to meet BOJ Governor Masaaki Shirakawa after the policy board meeting, and cabinet ministers were to decide the basic thrust of additional measures to help the slowing economy at a meeting later in the day.
"The government's fiscal policy and the BOJ's monetary policy should be in sync to send a strong message," Trade Minister Masayuki Naoshima told reporters.
But Japan's huge public debt, now twice the size of the economy, limits Tokyo's options, and the government is expected to propose shifting funds around rather than announce new substantial spending.
FLYING SOLO?
Japan will likely need to intervene alone if it were to step in to curb yen gains, as its Group of Seven counterparts, happy with the benefits to exports from their weak currencies, are in no mood for coordinated intervention.
Solo currency intervention, however, will not have much effect in weakening the yen unless joined by aggressive monetary easing by the BOJ, traders say.
In Monday's move, the central bank increased the volume of money available to banks under its fixed-rate fund supply operation to 30 trln yen ($351 bln) from 20 trln yen.
It also put in place a six-month fund operation in addition to the three-month loan programme already in place.
Of the 30 trln yen, 10 trln yen will be the six-month fund operation, BOJ said. The decision was by an 8-1 vote, with board member Miyako Suda dissenting.
The central bank, as widely expected, maintained its overnight core rate target at 0.1% by a unanimous vote.
The BOJ launched the funding scheme, which offers loans at 0.1%, in December. That failed to boost bank lending but helped to push the yen further away from a November high.
The BOJ last eased monetary policy in March, when it doubled the size of the fixed-rate fund supply tool to 20 trln yen.
