Bank of Japan Governor Masaaki Shirakawa’s “comprehensive monetary easing” may need to become more comprehensive. The central bank yesterday cut its benchmark overnight interest rate for the first time since 2008 and pledged to hold it at “virtually zero” until officials foresee a sustained end to deflation. Shirakawa and his board also adopted a 5 trillion yen ($60 billion) program aimed at lowering long-term borrowing costs and the premiums on corporate debt. The moves are likely to have little impact on growth as Japan struggles to prevent an appreciating currency from eroding its exports; the yen traded near a 15-year high after the announcement in Tokyo. With the BOJ itself saying the expansion will probably be slower than previously forecast, Japan may widen its quantitative easing in coming months. “It was a surprise in terms of the variety of policy elements they laid out, but for each one we have to add a footnote,” said Chiwoong Lee, senior economist at Goldman Sachs Group Inc. in Tokyo. “As economic conditions worsen they have to do more.” He added that another move may come in December. While officials cut the rate target, they kept the return on banks’ excess reserves held at the BOJ at 0.1 percent, lessening any impact, according to Lee. The expansion of bond buying pledged yesterday, at 3.5 trillion yen, is less than the last increase, in 2009. And the pledge to hold off on raising borrowing costs is less specific than one made in 2001, he said. Yen Strength Japan’s currency dropped as much as 0.8 percent against the dollar after the statement’s release. It traded at 83.13 at 2:39 p.m. in Tokyo after reaching 82.96 yesterday, the strongest since Japan intervened in foreign-exchange markets. The yen has soared in part because of signs that the Federal Reserve itself will enlarge its so-called quantitative easing. The Fed’s benchmark rate is also near zero, leaving quantitative easing -- increasing the size of its balance sheet -- its main tool. Chairman Ben S. Bernanke said two days ago in Providence, Rhode Island, that additional asset purchases “have the ability to ease financial conditions.” BOJ policy makers indicated they share Bernanke’s view, saying in their statement that their strategy will “encourage the decline in longer-term interest rates and various risk premiums.” Officials put the title “Comprehensive Monetary Easing” on the top of the release. The bank said in a monthly report today that the pace of the economic recovery is “slowing down” as exports and industrial production lose steam. Corporate Debt The cost of protecting Japanese corporate bonds from default was little changed after the announcement, with the Markit iTraxx Japan index slipping 1 basis point to 103 basis points as of 2:29 p.m. yesterday in Tokyo, according to Morgan Stanley prices. Yasunobu Katsuki, chief credit analyst at Mizuho Securities Co. in Tokyo, predicted the impact of the BOJ’s facility “will be limited.” Shirakawa said at a press conference yesterday that the asset program may be widened in size or scope “if necessary.” The fund, to be set up over a year, will purchase 3.5 trillion yen of government bonds, skirting the central bank’s self- imposed ceiling on holdings of those securities because of the facility’s “temporary” status. The bank intends to buy about 1 trillion yen of commercial paper, asset-backed commercial paper and corporate debt. The statement also said officials will examine Japan real-estate investment trusts and exchange-traded funds for the fund. Government officials welcomed yesterday’s step, with Finance Minister Naoto Kan saying there’s a united goal of defeating deflation. He reiterated that officials remain prepared to sell yen, after Japan intervened in the currency market for the first time in six years on Sept. 15. ‘Right Direction’ “This is a move in the right direction,” said lawmaker Yoichi Kaneko, part of a group in the ruling Democratic Party of Japan that has called on the central bank to do more. He said the BOJ ought to take steps that further expand its balance sheet to spur demand. “I think the stance they’ve shown is correct, but this isn’t a big change in policy.” Shirakawa and his colleagues had previously created a loan program for commercial banks, first set up in December 2009 and boosted twice to a current total of 30 trillion yen, which failed to stem a contraction in bank loans. Fourteen of 17 economists surveyed by Bloomberg News had anticipated a further increase yesterday. BOJ officials had also in August started a 3 trillion yen fund aimed at supporting innovative companies. While fiscal stimulus has been limited because of the need to avoid worsening the world’s biggest public debt load, Prime Minister Naoto Kan’s government plans a 4.8 trillion yen package of measures to bolster growth. Pimco on Japan “It is difficult to generate growth given Japan’s deflationary and demographic realities,” Paul McCulley, a managing director at Pacific Investment Management Co., which runs the world’s biggest bond fund, said on the company’s website. “Japan has limited political willingness to boldly pursue reflationary policies.” Consumer prices have fallen most years since 1998, and the nation’s population started falling in 2006. Meantime, the yen’s 11 percent appreciation versus the dollar threatens to stunt the nation’s recovery from its deepest postwar recession. Production Decline Industrial production unexpectedly declined for a third month and gains in retail sales were smaller than economists forecast, government figured released last week showed. The overall economy grew at less than half the pace in the April- June period compared with the previous quarter. “The economic growth rate is likely to be somewhat lower than expected” in July, the BOJ said yesterday. Policy makers are due to review their forecasts later this month. Nintendo Co., the world’s biggest maker of video-game machines, cut its annual net profit forecast by 55 percent to 90 billion yen last week in part because of the yen’s climb. “The BOJ’s new zero-rate policy could surely continue for years,” Seiji Shiraishi, an economist at HSBC Holdings Inc. and one of two analysts surveyed by Bloomberg News who predicted a rate cut yesterday, wrote in a note to clients. “But today’s measures will have limited positive impacts on the economy as Japan’s stagnancies are mainly coming from the structural weakness of final demand in the U.S.” To contact the reporter on this story: Mayumi Otsuma in Tokyo at motsuma@bloomberg.net To contact the editor responsible for this story: Chris Anstey in Tokyo at canstey@bloomberg.net

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