BOJ steps in against rising yen / Central bank ups loans to money market by 10 trillion yen, to 30 trillion yen

The Yomiuri Shimbun

The Bank of Japan decided at an extraordinary Policy Board meeting Monday to take new monetary easing steps to prevent further damage to the economy from the sharply rising yen and falling stock prices.

The central bank will increase lending to the market under its new type of open market operation, from 20 trillion yen to 30 trillion yen.

The additional 10 trillion yen will be offered to financial institutions via six-month loans, at a fixed annual rate of 0.1 percent.

The new money-easing steps are the first since March 17, when the central bank decided to increase the amount of fixed 0.1 percent rate, three-month loans offered to private financial institutions from 10 trillion yen to 20 trillion yen.

The central bank hopes that by supplying the longer-term loans and abundant funds to the market, it will bring down interest rates on long-term loans.

By stopping the narrowing of the gap between Japanese and U.S. interest rates, believed to be a major factor in the yen's appreciation, the central bank hopes to bring the yen's rise under control, economists explained.

In a statement announcing the new steps, the central bank said: "Uncertainty about the future, especially for the U.S. economy, has reached new heights, and the foreign exchange and stock markets have recently been unstable. In these circumstances, the bank has judged it necessary to pay more attention to the possible downsides in the outlook for Japan's economic activity and price levels."

In a related move, later on Monday the government decided on a framework for additional measures to stimulate the economy, a day ahead of schedule.

Bank of Japan Gov. Masaaki Shirakawa held a press conference Monday afternoon, before a meeting with Prime Minister Naoto Kan.

"To cope with the downside risks of the economy, the Bank of Japan has preemptively taken additional easing steps," Shirakawa told the press conference.

After meeting with Kan in the evening, Shirakawa said the prime minister had not made any specific requests regarding the Bank of Japan's monetary policy, but had praised the central bank's speedy action.

At the extraordinary meeting--the first since Dec. 1, immediately after the so-called Dubai shock, which also caused the yen to appreciate--the nine Policy Board members voted unanimously in favor of keeping the key interest rate unchanged at a minuscule 0.1 percent.

Only one member, Miyako Suda, opposed the new terms of loans to the open market.

In its statement, however, the central bank maintained its view on the current state of the economy, that "it is slowly recovering and will remain in a recovery trend."

The yen's value has risen sharply, especially in the past month. On Aug. 11, the Japanese currency traded at 84.72 yen against the U.S. dollar in the London exchange, the highest level in about 15 years. The rise was driven by concerns over a slowdown in the U.S. economy.

In response, the government and the Bank of Japan made only repeated verbal interventions--remarks such as "We'll carefully observe the situation"--but no actual market interventions or specific actions meant to tame the yen.

On Aug. 24, the Nikkei Stock Average fell below the 9,000 mark during trading hours for the first time in about 15 months, and closed below the psychologically important mark for the first time in about 16 months. On the same day, the yen reached 83.58 yen against the dollar in New York.

These events have compelled the government to launch full-fledged attempts to combat the appreciating yen.

In a rare step for a prime minister, Kan on Friday expressed hope that the central bank would introduce flexible and agile policies to address the booming yen, which is increasingly damaging Japan's export-reliant economy.

Furthermore, U.S. Federal Reserve Board Chairman Ben Bernanke hinted Friday that the U.S. central bank is planning further financial easing steps.

Bernanke's remarks caused the interest rate gap between the United States and Japan to narrow further, raising the possibility that the yen's strength might continue to increase.

A regular Bank of Japan Policy Board meeting is scheduled for next Monday and Tuesday, but the central bank decided to hold the extraordinary meeting Monday as it realized emergency measures were urgently needed.

Shirakawa, who was on a business trip to the United States, returned to Japan on Sunday, one day earlier than originally planned, to convene the extraordinary meeting.