BOJ surprises, leaves monetary policy as is


Japan's stock market is near 18-year lows

TOKYO, Japan (CNN) -- Japan's central bank surprisingly left its monetary policy unchanged Friday, resisting pressure to pump more liquidity into the nation's sluggish economy.

With share prices tumbling, economists and investors had expected the Bank of Japan would make more money available to the banking system, where bad loan losses are mounting.

They see salvaging the banks as a key component of rescuing Japan's stagnant economy.

But after a two-day policy board meeting, the BOJ said it decided to keep the official discount rate at its current level of 0.10 per cent and continue the policy adopted at its December 19 meeting, when it took credit-easing action to put more money into the banking system.

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Finance Minister Masajuro Shiokawa, who will meet his Group of Seven counterparts in Canada at the weekend, had earlier urged the BOJ to consider a further easing of rates.

Shares in big banks, which had gained ground in trading on the Tokyo Stock Exchange earlier in the day, were volatile after the BOJ's announcement.

Mizuho Holdings, the world's biggest bank by assets, closed up 1000 yen or 0.42 percent to 240,000 yen, after touching 251,000 yen earlier in the day.

At its December meeting, the BOJ raised the outstanding balance of current accounts held at the central bank by financial institutions to 10 to 15 trillion yen (about $75 billion to about $113 billion) from 6 trillion yen.

J.P. Morgan economist Ryo Hino said in a note before the BOJ announcement that "inaction would surely be met with disappointment, given that such a move (additional easing of monetary policy) is almost unanimously consensus."

Hino had suggested the BOJ would raise the upper limit for financial institutions' current account balances to 20 trillion yen ($150 billion).

Host of challenges


Japan's economy faces a host of challenges in 2002

Japan, the world's second largest economy, faces a host of challenges as it struggles with billions of dollars of bad bank loans, lackluster consumer demand, price deflation, a record jobless rate and its fourth recession in a decade.

Most analysts expect the economy will shrink by at least 1 percent this year before growing by about 0.9 to 1.0 percent in 2003.

Additional liquidity for the banking system is one of three crucial steps for Japan if it is to get an economic recovery going, according to regional analyst Richard Martin of IMA Asia.

Martin told CNN that Japan had to separate its recovery strategy from its reform strategy.

Martin said Japanese Prime Minister Junichiro Koizumi was making no ground on his reform agenda, but potentially could do better with a recovery strategy.

Narrow window

"Like many others, we have been saying since August that Koizumi had a narrow window of about six months in which he had to get momentum up for his reform program, or he would lose out to the LDP old guard," Martin said.

But now, despite Koizumi's expressed commitment to pursue structural reform in the face of declining public approval, Martin said he was highly sceptical that substantial changes could be made.

He said the most likely result was a "slow death" for Koizumi, unless he made a drastic political move such as calling a snap election in pursuit of a fresh mandate.

For that reason, Japan should put reform aside and aim for a recovery based on exchange rates, liquidity and holding the line on budget spending.

"Japan can accomplish a recovery; the downside is that it will not be a long-term fix," Martin said.

He noted that in a "swift piece of theater", the yen's exchange rate against the U.S. dollar had been managed down by 15 percent to 135 without destabilizing the rest of Asia.

Problem for Malaysia, HK

Martin said 135 yen was already a problem for Malaysia and Hong Kong, because of their pegged exchange rates. But China, Korea and Taiwan could live with a rate of 133-135.

"Asia starts to come apart at 140 yen to the U.S. dollar," he said.

Devaluing the yen was one step towards recovery. Two others were flooding the market with liquidity, and holding the line on the budget, by cutting back, for example, on construction spending.

"There is a bailout of the banks ahead of us," Martin said.