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Economy

BOJ ready to join global central bank response to coronavirus

G-7 finance chiefs to hold teleconference on outbreak later Tuesday

The Bank of Japan has already pledged to provide liquidity and ensure market stability in the face of the coronavirus crisis. (Photo by Kei Higuchi) 

TOKYO -- Expectations are growing for coordinated central bank action to cushion the economic fallout from the new coronavirus epidemic that has spread globally. This raises the question of what the Bank of Japan might do at its policy meeting later this month.

Despite long-term interest rates already around zero and short-term rates at minus 0.1%, economists say the BOJ still has ammunition to soothe jittery markets and stabilize a Japanese economy that is heading for recession. 

Next up for Gov. Haruhiko Kuroda is a teleconference later Tuesday with the finance and central bank chiefs of the Group of Seven nations. The BOJ will then hold monetary policy discussions on March 18-19, ending a day after a U.S. Federal Reserve meeting, where a 25-50 basis point interest rate cut is in the cards.

"We'll see in the near term how each central bank will tackle this situation, but I do think Japan definitely will do something as well if it needs to," said Takeo Kamai, who is responsible for equity trading in Tokyo at investment bank CLSA. The upcoming BOJ policy meeting "is definitely something everyone will be paying attention to."

The BOJ issued a rare statement on Monday, in which it pledged to provide liquidity and ensure market stability. The bank also said it would buy 500 billion yen ($4.62 billion) worth of government bonds -- moves that helped stem a slide in the Japanese stock market. This followed a similar statement by the Fed, and the European Central Bank followed suit on Monday.

Anticipating policy moves, the Dow Jones Industrial Average logged its biggest-ever daily point jump on Monday.

Until recently the focus had been on fiscal stimulus, as the global economy shifted into low gear amid the trade war between the U.S. and China. But this year, Kamai said, will likely bring "not only fiscal stimulus but also monetary policy being tweaked by central banks to support the global economy."

Coordinated policy action is not expected to be anything like that seen in the 1980s, when the U.S., Japan, Germany and France cut interest rates in a coordinated fashion to support U.S. growth.

"Economic circumstances facing G-7 countries are diverse. Each country will adopt a different policy," predicts Hiroshi Ugai, chief Japan economist at JP Morgan Securities and a former senior BOJ official. "There is no need for coordinated interest rate reductions."

Ugai expects the message from the G-7 is likely to be that they are going to closely share information and work together to stabilize the financial markets.

One option for the Japanese central bank, Ugai said, would be to expand its asset purchase and loan support programs to make more liquidity available to sectors that have been hardest hit by the virus outbreak.

The BOJ could strengthen policy schemes that have not been updated since their introduction in 2013, when Kuroda took out his bazooka with a massive quantitative easing program. 

BOJ Gov. Haruhiko Kuroda fields questions during the G-20 meeting of finance ministers and central bankers in Riyadh on Feb. 22.

The bank has been purchasing corporate bonds and corporate commercial paper since then, but has kept the balance at 3.2 trillion yen for bonds and 2.2 trillion yen for CPs.

A prolonged slump could trigger cash crunches in Japan's tourism industry, with hotels, retailers and restaurants suffering a sharp drop in customers. The outbreak has also disrupted the manufacturing sector, as a halt in production in China has caused parts shortages in Japan, leaving factories unable to operate.

The 47 trillion yen loan support program is another way to inject liquidity into the troubled sectors through banks. Under the scheme, introduced in 2012, the BOJ loans money for up to four years at zero interest rates for banks that have expanded lending.

The BOJ could lower the lending rate under the loan support program to minus 0.1% from zero, predicts Shuichi Ohsaki, interest rate strategist at Merrill Lynch Japan Securities. "A negative rates lending scheme is an option," he said.

This means that commercial banks would be able to borrow money from the BOJ and receive an interest rate of 0.1%, essentially a BOJ subsidy, Ohsaki said.

Merrill Lynch, however, does not expect changes to other monetary policy targets, such as those for short-term interest rates, now at minus 0.1%, or equity purchases, now at 6 trillion yen a year.

These programs have been underutilized in recent years, partly because the economy had been performing well and also because of serious side effects, such as squeezing profit margins at banks, reducing the liquidity of the markets and fueling fiscal laxity.

Changes to these policy tools would require clear evidence that growth will be slowing for a sustained period beyond January-March, according to Marcel Thieliant, an economist at research house Capital Economics. Most economists expect a rebound in growth after a contraction in the first quarter.

Economists say that the first step for the BOJ would be fully utilizing its quantitative easing programs. Last year, the balance of Japanese government bonds held at the central bank increased only 16 trillion yen against a target of 80 trillion yen, while equity purchases totaled 4.37 trillion yen versus a target of 6 trillion yen.

The yen's relative stability against the dollar, at around 108 -- a key factor influencing Japanese exports and inbound tourism -- also gives Kuroda room to preserve ammunition.

"We stick to the view that the hurdle for the BOJ deposit rate cuts, or deepening the negative interest rate policy, remains high with the risks rising only if the dollar-yen rate drops below 104," said Izumi Devalier, chief Japan economist at Merrill Lynch.

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