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Economy

BOJ expands monetary stimulus to defend economy from coronavirus

Japan's central bank doubles ETF and REIT targets as it starts new lending program

Bank of Japan Governor Haruhiko Kuroda said the central bank will buy ETFs " twice as much as before and for as long as necessary" in a news conference in Tokyo on March 16. (Photo by Kai Fujii)

TOKYO -- The Bank of Japan expanded its monetary stimulus at a hastily called one-day policy meeting on Monday, joining other central banks rushing to support a global economy hit by the spreading coronavirus.

The BOJ will bolster its asset-buying program, expanding purchases of stocks, corporate bonds and corporate commercial paper, while also boosting its loan support program to help businesses deal with any liquidity issues.

The central bank will double its upper limit of annual purchases of exchange traded funds to 12 trillion yen ($112.46 billion) and of real-estate investment trusts to 180 billion yen per year.

It will also expand the upper limit of its corporate bond balance to 4.2 trillion yen and its commercial paper balance to 3.2 trillion yen, each up 1 trillion yen.

In addition, it will start a lending program for commercial banks, providing them with one-year loans in exchange for corporate collateral worth 8 trillion yen.

Other policy tools were kept unchanged, with short-term interest rates at minus 0.1% and long-term interest rates at around zero. It will continue to increase its holdings of Japanese government debt by 80 trillion yen a year.

"We will purchase ETFs twice as much as before and for as long as necessary," BOJ Governor Haruhiko Kuroda said at a news conference.

"We believe it helps to support the damaged market sentiment. There is no need to become pessimistic just because the policy announcement didn't produce a stock market rally today."

Kuroda said that the BOJ has done enough to calm the market but added that he would not hesitate to take additional steps if pressure on the economy and inflation grows.

The situation in China and South Korea appears to indicate that the outbreak would not last long, he said, but added that it is now spreading out to Europe and North America. For the global economy, "downward pressure is likely to remain for a while," he said.

The Nikkei Stock Average spiked upward for a short period of time after the announcement before dropping to close 2.46% lower than it did on Friday.

"The steps taken by the BOJ are in line with expectations," said Shuichi Ohsaki, interest rate strategist at Merrill Lynch Japan Securities. "The most impactful announcement was the doubling of equity purchases by the BOJ. The overall impression is that the announced measures aren't too radical. The central bank didn't dig deeper into negative interest rates, for instance."

He added that "monetary policy isn't the most effective instrument to deal with the coronavirus crisis. The focus is likely to shift to fiscal policy."

Takeo Kamai, who is responsible for equity trading in Tokyo at investment bank CLSA, said the policy measures are something that have been already "widely spoken about in the market." He pointed out that "maybe people had expected [rate cuts] would be one way to make the yen depreciate further from this level. But I think there is a reason why the ECB (European Central Bank) didn't lower rates as well as the BOJ."

It is the first time in almost four years for the BOJ to ease its monetary policy.

"Today's step follows the surprise rate cut by the FOMC," Kamai said. "It really goes to show that the governments are working together around the world to tackle this issue globally as one force rather than by each sovereign country."

The bank brought forward its scheduled two-day meeting, which had been set for Wednesday, to confront the crisis. Its decision followed emergency moves by the U.S. Federal Reserve on Sunday to reduce its benchmark interest rate by 100 basis points to nearly zero and resume its quantitative easing program.

The Fed had already made a 50-basis-point emergency rate cut back on March 3.

Also on Monday, New Zealand's central bank made a 75-basis-point rate cut to a record low after an emergency meeting.

Central banks are stepping in as the world braces for economic shocks from the pandemic. To varying degrees, countries have in effect closed their borders, grounded flights, shuttered bars and restaurants and stepped up surveillance of flows of people.

But there is a growing perception that monetary policymakers have already used much of their ammunition and are groping for effective ways to spur their economies.

The European Central Bank last Thursday decided to expand its loan support program for commercial banks, but stopped short of lowering its key deposit rate, which is already at minus 0.5%.

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