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Tuesday, March 25, 2003

BoJ Emergency Meeting Disappoints

The Bank of Japan, which met earlier today for an emergency session, voted to increase the purchase of shares from Japan's struggling banks, but stopped well short of taking the radical anti-deflation measures some had expected. The measures agreed upon fall far short of the 'unorthodox' measures that many have been calling for, and seem to cast rather a long shadow over the speculation that Fukui would be more radical than expected.

The central bank voted 7-2 to expand a scheme to buy shares from commercial banks to Y3,000bn from the previous Y2,000bn limit. It also said it would provide as much liquidity as the markets needed to counter any turbulence generated by the war in Iraq. Markets, which had stayed relatively firm in the morning session in spite of falls on Wall Street overnight, were disappointed. The Nikkei stock average, which has rallied over recent days, fell sharply on the BoJ announcement, closing down 2.3 per cent to close at 8,238.76. "These are just small steps within the current monetary framework," said Nobuyuki Nakahara, a former BoJ board member who advocates more radical anti-deflationary measures. "They do not represent the fundamental changes of policy that Japan needs."

The board meeting, convened by Toshihiko Fukui, who became governor last week, was the first emergency gathering to be called since the BoJ became independent in 1998. This had led to speculation that Mr Fukui might be preparing to take bold action against deflation, which has been plaguing the economy since 1995. Some economists had predicted the bank would start buying exchange-traded funds, a proxy for the stock market, or foreign bonds, which could result in what many economists believe is a much-needed weakening of the yen. There was also a suggestion that the BoJ might take action to make the market in small- and medium-sized company debt more liquid, another request by politicians anxious to shore up the economy.Jesper Koll, chief economist at Merrill Lynch, said the new BoJ governor had raised expectations in parliamentary testimony of bolder action. "You cannot make these sort of statements, call an emergency meeting and then do nothing. It's just not good enough."

In September, the BoJ broke a long-standing taboo by saying it would buy Y2,000bn of shares from banks. On Tuesday, in addition to raising that limit to Y3,000bn, it increased maximum purchases from individual banks from Y500bn to Y750bn. Although the bank stopped short of radical action, it said it would examine the effectiveness of the current policy framework in time for its regular policy board meeting on April 7-8.Many analysts wondered what there was left to talk about. "We've had asset deflation for 12 years and price deflation for six years," said Mr Koll. "We don't need discussion. We don't need debate. We need action."
Source: Financial Times

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