BOJ eases policy to shore up confidence, pumps cash

Reuters News
Posted: Mar 22, 2011 11:45 AM
BOJ eases policy to shore up confidence, pumps cash

By Leika Kihara and Rie Ishiguro

TOKYO (Reuters) - Japan's central bank doubled its asset buying scheme to 10 trillion yen and pumped record funds into the banking system on Monday to shore up confidence in the economy hit by a triple blow of a massive quake, a tsunami and a nuclear emergency.

The Bank of Japan said its action was a pre-emptive step to counter worsening of business sentiment after markets swooned at the shock of Friday's 8.9 magnitude earthquake and a tsunami that may have killed more than 10,000 and has left millions without power, water or homes.

The central bank said it was still sticking to its view that the world's third largest economy would resume its moderate recovery, though warned about a likely drop in economic output after the disasters and vowed to do whatever necessary to limit the economic fallout.

"But this time's earthquake has inflicted damage in a wide area. Output is likely to fall for some time. We are also worried that corporate and household sentiment will worsen," the BOJ said in a statement after its board voted 8 to 1 to expand its 5 trillion fund pool put in place last October to support Japan's recovery after the global economic crisis.

In an unanimous vote the board also kept, as expected, its benchmark rate at 0-0.1 percent.

While the fund increase came as a surprise to some economists, some said the central bank could have done more.

"My initial impression is that the BOJ could have done more. Its traditionally reserved stance on policy easing remains in place even after the massive earthquake," said Masamichi Adachi, senior economist at JPMorgan Securities Japan.

"The BOJ also kept its economic assessment unchanged. The bank thus seems to be not fully taking account of strong uncertainty shrouding Japan."

Prior to the rate review, the BOJ offered to pump a record 15 trillion yen ($183 billion) in the banking system, well above usual 1-2 trillion, to assure investors that markets will function properly. It topped up that amount with an offer to pump another 3 trillion yen into the market in the afternoon. Damage estimates also remain sketchy. Many factories have been forced to shut in the area due to power outages, while others have reported flooding or quake damage.

Tokyo's stocks plunged more than 6 percent after the market reopened on Monday as investors tried to gauge the huge economic cost of Friday's quake and tsunami.

Moody's ratings agency said it saw no major disruption to Japan's payment system but that the economic fallout from the disaster appeared greater than initially expected, even though it was still waiting for a full assessment of the damage.

"The economic consequences appear to be greater than we perhaps originally expected on Friday," Tom Byrne, Moody's senior vice president, told Reuters Insider in an interview.

The BOJ offered a total of 15 trillion yen ($183 billion), well above usual 1-2 trillion, on Monday morning to assure investors that markets will function properly.

"The move is aimed at stabilizing financial markets and ensuring smooth fund settlement," a BOJ official told Reuters.

Japan is battling to prevent a nuclear catastrophe and to care for millions of people without power or water, just as a new wave of water was heading toward Japan's northeast coast and a hydrogen explosion rocked an earthquake-stricken nuclear plant 240 km north (150 miles) north of Tokyo.

The BOJ said in a statement that there were no reports so far of system glitches or funding problems at Japanese financial institutions, including those in the quake-struck region.

($1 = 81.915 Japanese Yen)

(Additional reporting by Yoshifumi Takemoto in Tokyo and Raju Gopalakrishnan in Singapore; Writing by Tomasz Janowski, Editing by Kim Coghill)