BOJ bucks global easing trend, sticks to recovery view

TOKYO Thu Jul 12, 2012 2:01am EDT

A man walks past the Bank of Japan headquarters in Tokyo June 15, 2012. REUTERS/Yuriko Nakao

A man walks past the Bank of Japan headquarters in Tokyo June 15, 2012.

Credit: Reuters/Yuriko Nakao

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TOKYO (Reuters) - The Bank of Japan held off on further policy easing on Thursday despite slowing global growth that has driven other major central banks into expanding stimulus, convinced that robust domestic demand will keep Japan's economic recovery on track.

The yen briefly fell and government bond futures rose after the central bank reshuffled the composition of its 70 trillion yen ($879 billion) stimulus program to buy more short-term securities and reduce the amount offered in fixed-rate market operations.

But the initial market reaction soon faded and the yen bounced back as the move was mainly a technical adjustment by the central bank, which is desperately trying to force-feed money to markets already awash with excess cash.

Bond futures, however, held on to initial gains, supported by the central bank decision to abolish a 0.1 percent minimum rate for its purchases of short-term securities.

"The BOJ slightly tweaked the content of the asset buying scheme but this does not mean it implemented any new easing steps, and it did not increase its long-term bond buying," said Yoshimasa Maruyama, chief economist at Itochu Economic Research Institute in Tokyo.

"October is the next possible chance for a BOJ easing because the central bank may lower its growth forecasts along with a downgrading of its view on overseas economies."

As widely expected, the central bank kept its policy rate at a range of zero to 0.1 percent, and held off on a further increase in its asset buying and lending program.

GLOBAL EASING

The decision came hours after the Bank of Korea joined the global rush to ease monetary policy, cutting its benchmark rate for the first time in more than three years to fend off the effects of a global slowdown.

Some market players had expected the BOJ to follow up on last week's stimulus measures by the central banks of the euro zone, Britain and China with its own monetary expansion in a coordinated move to ease the pain from the global slowdown.

But with no clear signs that Japan's recovery prospects are under threat and the yen off record highs, the BOJ likely saw little need to tap its depleted arsenal now.

"While other central banks are proceeding with monetary easing and quantitative easing to battle the economic slowdown, today's decision showed the BOJ's determination to not follow suit," said Junko Nishioka, chief Japan economist at RBS Securities.

RECOVERY INTACT

The Bank of Korea joined central banks from Europe to Brazil and China, which have lowered their interest rates over the past week to shore up their economies and buffer the global economy from the prolonged debt crisis and slump in the euro zone.

While Japanese central bankers are also worried about the global slowdown, they have stressed that any further easing will come only if the anticipated moderate recovery is under threat.

For now, the BOJ stuck to the view that solid private consumption and spending on reconstruction after last year's earthquake will help Japan outperform most of its Group of Seven peers with growth of around 2 percent.

In a quarterly review of its forecasts, the BOJ said it now expects the economy to grow 2.2 percent in the year to March 2013 and 1.7 percent the following year, largely unchanged from its April projection.

Lower commodity prices prompted the BOJ to cut its core consumer inflation forecast to 0.2 percent for the current fiscal year from 0.3 percent.

But it maintained its forecast of 0.7 percent inflation in the following year, signaling that it expects Japan to make steady progress toward a sustained end to deflation.

The BOJ set the 1 percent inflation target and eased policy in February, and followed up with additional stimulus in April, to show its determination to hit that goal.

Some economists expect the next easing in October, when the BOJ issues a semiannual report that will include forecasts through to March 2015.

But the fact the BOJ had to fine-tune its market operations on Thursday shows that there are limits to how much more it can boost the asset buying and lending program.

The program is made of two pool of funds - one for direct asset purchases and another for three- and six-month funds offered in market operations.

The BOJ has missed its targets for six-month operations over the past few weeks - a sign banks have ample cash amid tepid demand for credit.

That has led the central bank to cut the size of fixed-rate operations and instead buy more short-term securities, and to scrap the minimum 1 percent interest for such purchases.

Japanese bank lending rose just 0.7 percent in June from a year earlier, though the pace did pick up from May, data showed earlier this week.

Analysts say Thursday's move will smooth out BOJ's fund supply, at least in the near term.

"The BOJ will be able to supply more funds via purchases of short-term securities. This draws it closer to the kind of operation that was conducted during (the previous spell of) quantitative easing," said Hidenori Suezawa, chief strategist at SMBC Nikko Securities in Tokyo.

(Additional reporting by Stanley White, Kaori Kaneko and Tetsushi Kajimoto; Editing by Kim Coghill)

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