Bank of Japan move to take yen lower will aid business

CHALK UP a victory, of sorts, for Sharp and Panasonic. It was during a trip to Osaka last month that Masaaki Shirakawa, governor of the Bank of Japan, had his ear bent by representatives of the country’s fast-fading consumer electronics groups.

The strong yen was killing their businesses, they told him. Japan’s manufacturers needed relief from an unrelenting cycle of lower profits, lower job growth and lower demand.

The message seems to have got through. Yesterday’s decision by the Bank of Japan to add 10 trillion yen (€96.5 billion) to its asset-purchasing programme, while tweaking the rules to make it easier to achieve a total Y80 trillion by the end of next year, was remarkable enough, at a time when most of the market was expecting no action at all.

But what many observers noted was a new entry on the central bank’s list of big risks . . . “the effects of financial and foreign exchange market developments on economic activity and prices”.

Translation: a high yen hurts Japan. “This was all about the currency,” said Shogo Fujita, chief Japanese bond strategist at Bank of America Merrill Lynch in Tokyo.

If the Bank of Japan had wanted to lift stocks, it could have bought exchange traded funds. If it had wanted to lower long-term bond yields, it could have bought long-term bonds.

Instead, it is spending an extra 2 per cent of gross domestic product on short-term bills and bonds of up to three years to maturity – which is the section of the bond market most closely linked to foreign exchange. Lift prices here, the theory goes, and you send the yen down against the dollar.

“The aim was to depreciate the yen, to buy time,” Mr Fujita said.

The change of tack is significant, in two respects. First, it suggests the central bank is increasingly conscious of the need to try to keep pace with the apparently limitless easing of the US Federal Reserve and the ECB.

In the minutes after last week’s declaration by Fed chairman Ben Bernanke that it would keep printing money until enough Americans had jobs, the yen surged against the dollar before snapping back. Maybe the Bank of Japan, under orders from the government, dropped a few hints of intervention. Maybe it did not. The episode underlined the power of a central banker to move a currency.

Second, the new line on the yen suggests that Mr Shirakawa, who ends his five-year term in April, has half an eye on his legacy. Previously, the governor had claimed that the advantages and disadvantages of a strong yen were fairly evenly balanced. While that argument has much to commend it – a stronger yen means cheaper fuel, for example – there is no point in the governor making it if he threatens the central bank’s cherished independence by doing so.

Japan is on the cusp of elections that the main opposition party – the Liberal Democrats – stands every chance of winning. One of its policy pledges could involve tearing up the Bank of Japan Act to make the board more accountable to government, should it fail to stimulate growth.

It may be too much to expect a new understanding of the interplay of forex and monetary policy to revive Japan’s industrial heartland. But any sustained move to lower the yen could be said to have been made in Osaka. – (Copyright The Financial Times Limited 2012)