The Bank of Japan said it was prepared to cut interest rates further into negative territory as it became the first G7 central bank to follow the Federal Reserve’s weekend intervention by saying it would double its annual target for equity purchases to ¥12tn ($112bn).
The decision, which came with a pledge to provide ample yen funds and continue buying Japanese Government Bonds, followed an emergency meeting on Monday that the BoJ brought forward by two days in the wake of market turmoil stemming from coronavirus fears.
“It is possible for us to cut interest rates further into negative territory and we will do so if needed,” said Haruhiko Kuroda, BoJ governor. However, the central bank kept its overnight interest rate at minus 0.1 per cent, and added that the priority was to provide smooth corporate financing and stability to financial markets.
In an easing move that attempted to match the shock value of the Fed’s rate cut, the BoJ’s measures appeared designed to exceed market expectations. But analysts questioned the effectiveness of the strategy given the Japanese central bank’s limited options as it enters its fifth year of negative interest rates.
While the BoJ said it would increase the upper limit of its annual purchases of exchange traded funds to ¥12tn, analysts said the market was disappointed that the bank maintained its central target of ¥6tn a year. The benchmark Topix index fell more than 2 per cent.
The BoJ has been buying ETFs for almost 10 years to stabilise the market, lower the risk premium and encourage investment. The new upper limit gives the BoJ the scope but not the obligation to buy twice its current target amount.
If the BoJ met its new upper limit, it would be on track to overtake Japan’s Government Pension Investment Fund as the single largest holder of Japanese equities later this year.
Japan is among the nations assembling a co-ordinated response to the market ructions created by the spread of coronavirus as policymakers battle to stop the turmoil becoming a financial crisis.
The yen drifted higher after the BoJ’s announcement but remained in the range of ¥106 per US dollar — a level that analysts did not expect would lead to intervention from Japanese authorities.
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To help companies cope with the pandemic, the BoJ also said it would set up a new one-year facility that would offer loans against corporate debt as collateral at a zero-per cent interest rate. In addition it increased the upper limit for its purchases of commercial paper and corporate bonds by ¥2tn.
Mr Kuroda said the current turmoil differed from the 2008 Lehman crisis, which stemmed from troubles with financial institutions, but he warned there was high uncertainty about the depth of the pandemic impact on the global economy.
“At this point, I don’t think anyone is anticipating the kind of the serious slump in the real economy that was seen during the Lehman shock,” he said. “But it’s hard to say there will be a V-shaped recovery for the global economy.”
Shortly after the BoJ decision, Japanese Prime Minister Shinzo Abe said: “It was a swift and appropriate move in the midst of market turmoil in Japan and worldwide.”
Despite the eye-catching increase in its equity purchase target, some economists described the BoJ’s move as mere “tinkering at the margin” and not aggressive enough to make a significant impact.
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Marcel Thieliant, a Japan economist at Capital Economics, said: “The measures announced by the Bank of Japan today lack teeth and we still believe that the bank will eventually lower its short-term policy rate.”
Masamichi Adachi, Japan economist at UBS, said he was sceptical that the BoJ’s move would produce any economic boost, but warned that when considering the likely effects on markets and on the economy, the focus should be on what would have happened without it.
“This was an emergency backstop by the lender of last resort. It is about turning a big negative into a smaller negative. If they had not done this, the situation would have been much worse,” said Mr Adachi.