August 14, 2001

Bank of Japan Decides

To Ease Monetary Policy

A WALL STREET JOURNAL ONLINE News Roundup

TOKYO -- The Bank of Japan voted Tuesday to ease its grip on credit further in a bid to put a lid on the nation's economic deterioration and help buoy falling stock prices.

The BOJ Policy Board made the decision by a majority vote after a two-day meeting amid growing political pressure on the central bank to ease its already ultra easy monetary policy further to pull the economy out of recession. Board members were also mindful of this week's slump on the Tokyo stock market to nearly 17-year lows.

See the full text of the Bank of Japan's monetary-policy change statement.

* * *

Japanese Central Bank Faces New Pressure to Curb Deflation (Aug. 9)

Japan's Central Bank Lowers Economic Assessment for July (July 16)

Japan's Central Bank Will Stick With Its Loose Monetary Policy (June 20)

The BOJ said it will raise the total amount of cash reserves in current accounts held at the BOJ by financial institutions to some 6 trillion yen from the current 5 trillion yen ($48.79 billion), a move that would boost liquidity in the banking system.

The central bank also said it will increase its outright purchases of outstanding long-term Japanese government bonds to 600 billion yen a month from the current 400 billion yen.

In announcing the decision, the BOJ pointed to the recent tumble in stocks prices and its possible adverse effect on the economy and a fall in exports and the resulting negative effect on production.

"Economic adjustments are deepening as industrial production is sharply declining due to a fall in exports. Risks are increasing for the adjustments to spread to wider areas as falling production is expected to cause an associated decline in domestic demand," the BOJ said in a statement.

"Recent capital market developments at home and abroad may also adversely affect the real economy. A weaker demand could intensify downward pressure on prices in the coming period," it said.

The latest credit easing is the first in five months, following a decision in March to adopt a quantitative monetary easing step with a shift in its policy target from the unsecured overnight call rate to the balance of funds held by financial institutions in current accounts at the central bank.

"Earlier this year, the bank has taken monetary easing measures unprecedented in the history of central banking, with firm determination to prevent a continuous decline in prices and to form a basis for sustainable economic growth. Consequently, ample liquidity has been provided to financial markets and interest rates have declined to extremely low levels," the BOJ said.

"However, given the adverse recent and prospective developments regarding growth and prices, the bank considered it appropriate and necessary to further strengthen monetary support for economic recovery under the new framework established in March," it said.

The BOJ's move was lauded by Japan's Economy Minister Heizo Takenaka, who called it a "timely move."

"Given deteriorating economic conditions, deflationary pressures and the government's commitment to structural reforms, I believe the BOJ's decision was a timely one," Mr. Takenaka said in a statement.

Mr. Takenaka added that the government will continue to implement structural reforms needed to revitalize the economy, such as compiling next fiscal year's budget which aims to slash wasteful spending in reflection of Prime Minister Junichiro Koizumi's commitment to fiscal reforms.

"I hope the BOJ will continue to implement monetary policy in a flexible fashion depending on [economic] conditions," Mr. Takenaka said in the statement.

The BOJ had been widely expected to stand pat as senior bank officials have repeatedly said recent economic deterioration and stock-price tumbles were within the expectations the bank held when it last eased policy in March. The board voted unanimously to keep policy on hold as recently as July 13.

Tuesday's easing comes almost exactly a year after the BOJ raised rates for the first time in a decade -- a tightening it was forced to reverse in February and March.

The government has stepped up the pressure on the BOJ to ease policy as it prepares harsh economic reform measures, such as a cleanup of banks' bad loans, but the central bank until Tuesday indicated it wanted to see more pain before it eased again.