TOKYO -- The 32 branches of the Bank of Japan, the country's central bank, have embarked on an emergency survey of companies in each district to grasp the impact of the intensifying trade war on exports and supply chains.
The memories of the 2008 financial crisis remain vivid among Japan's central bankers. Japanese companies are especially vulnerable to a slump in trade, with many shipping materials and industrial equipment throughout the world. After the collapse of Lehman Brothers, none of the leading countries suffered as much as Japan in terms of the drop in industrial output.
As the U.S.-China trade war casts a shadow over the global economy, and as such new concerns as Turkey's lira crisis emerge, the BOJ is shifting focus to protecting the domestic economy and putting its long-held inflation goal on the back burner.
This shift was behind the central bank's adjustment to its large-scale monetary easing policy in late July. The bank let the benchmark long-term policy rate fluctuate more widely around zero.
The widening of the rate band raised the ceiling on long-term rates to 0.2% from 0.1%. It also in effect lowered the floor, from minus 0.1% to minus 0.2%. Meanwhile, the bank introduced forward guidance, saying loose monetary policy will continue for the foreseeable future.
Financial markets read these moves as contradictory, hinting at both tightening and prolonged easing. Views arose that that the bank was approaching an exit to its long-running easing policy.
But the BOJ actually acted "out of consciousness of the economy's underlying risk, despite markets not being prepared for" the move, according to a source affiliated with the central bank. Those risks include the trade war, worries about emerging markets and the prospect of the 8% consumption tax rising to 10% in October 2019.
"If the trade war accelerates, or emerging markets go into a crisis, nobody will be talking about Japan's low prices," a BOJ official said.
An assessment of the impact of the trade war will be included in the October edition of its Outlook for Economic Activity and Prices report.
By January, Japan will have enjoyed the country's longest economic recovery since World War II. But the strength of the economy relies heavily on the performance and actions of the U.S. and China, the engines of the global economy.
Voices in the U.S. are becoming increasingly conscious of the prospect of a pause in rate hikes next year. Federal Reserve Chairman Jerome Powell said in late August that while inflation had moved near 2%, no clear sign has been seen of an acceleration above 2% and there does not seem to be an elevated risk of overheating.
Against this backdrop, the possibility of Japan's economy peaking out and heading into a decline becomes more real. But the BOJ has few cards left to play in the event of a slowdown.
"It is significant that July's policy shift not only raised the ceiling, but also lowered the floor for long-term interest rates," a source connected to the central bank said. The BOJ's move to lower the threshold for long-term interest rates to minus 0.2% leaves room for rates to sink lower in a hypothetical slowdown.
The raising of the ceiling, on the other hand, was geared to letting financial institutions reap income from the government bond market -- something they have struggled to do amid ultralow rates.
Though easing is all but certain to continue, the BOJ's next steps will likely be influenced more by economic movements than by prices. It will likely explore mild hikes to key rates if the economy is healthy and consider additional easing measures if it is decelerating.
At the time of July's policy shift, BOJ Gov. Haruhiko Kuroda told reporters that "with various uncertainties in mind, we will maintain our present extremely low interest rates."
But the central bank's efforts quickly hit a hurdle, as its change to the rate band proved insufficient to prompt large movements. On Aug. 29, there were no takers for new 10-year Japanese government bonds handled by Japan Bond Trading.
While BOJ officials say it is too early to jump to conclusions, some are disappointed that the July policy adjustments have not stimulated more movement in interest rates.
Unable to get its message understood by market players, Japan's central bank has the unenviable task of heading into the global turbulence that awaits.