Billions pumped into banks

CENTRAL BANK: JAPAN’S CENTRAL bank yesterday made 21,800 billion yen (€190 billion) available to financial institutions and …

CENTRAL BANK:JAPAN'S CENTRAL bank yesterday made 21,800 billion yen (€190 billion) available to financial institutions and doubled its asset-buying programme to 10,000 billion yen in a bid to stabilise markets following the earthquake disaster.

In its largest one-day liquidity operation to calm markets, the Bank of Japan said it would make 15,000 billion yen available immediately and a further 6,800 billion yen over the next two days to deal with any rise in demand for funds.

The bank said its decision to double the asset-buying programme was taken “with a view to pre-empting a deterioration in business sentiment and an increase in risk aversion in financial markets from adversely affecting economic activity”.

Economists generally welcomed the central bank’s move as a measure to quell potential panic over access to funds in the wake of a disaster.

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The Tokyo stock market plunged 6.2 per cent yesterday while government bonds jumped on fears the economy could be damaged by the effects of the earthquake and planned electricity cuts. Hiromasa Yonekura, head of Japan’s powerful Keidanren business lobby, said the disaster would have “an enormous impact” on the economy.

But some economists said the liquidity injection was not likely to be enough to counter the negative impact of the earthquake and tsunami on the economy, already weakened by a strong yen and deflationary pressures.

“It can be judged positive . . . but the [central bank] hasn’t done enough so far [to stimulate the economy], so eventually it will have to take stronger measures,” said Mitsumaru Kumagai, chief economist at Daiwa Institute of Research. He expected the earthquake and the power cuts to reduce Japan’s gross domestic product by 0.6 percentage points, but forecast that reconstruction investment would eventually make up a large part of the decline.

The central bank injection helped pull yields on the country’s sovereign debt sharply lower. The benchmark 10-year Japanese government bond yield is down 10 basis points to 1.2 per cent.

The yen initially rallied yesterday morning but pared its gains after the announcement.

Yuichiro Nagai, economist at Barclays Capital in Tokyo, said that, while the Bank of Japan’s measures were helpful, the government’s fiscal steps to deal with the crisis would be more important.

The government has indicated it aims to adopt an emergency stimulus package, but Yoshihiko Noda, minister for finance, said yesterday this was not likely to happen before the end of the fiscal year on March 31st, because of the time it would take to assess the extent of funds needed to rebuild the devastated region.

For the time being, the government plans to dip into the 200 billion yen in budget reserves it has available.

Concern also rose about an increase in the yen’s value against key currencies, as insurance companies are expected to repatriate funds from overseas to help pay for disaster claims.

The central bank would have to send a strong message of some sort that it was willing to deal with the risk of a higher yen, said Masaaki Kanno, chief economist at JPMorgan in Tokyo.