MARKET SAVVY : Bank of Japan’s Yen Stance Riles Markets : Asia: Stocks dive after central bank refuses to loosen monetary policy, despite yen’s strength.
The Bank of Japan put its foot down on Tuesday. But did it crush the country’s hot stock market by doing so?
Bank of Japan board members unexpectedly voted to keep monetary policy unchanged, resisting pressure from politicians to expand the nation’s money supply to help slow the surging yen.
The decision by Gov. Masaru Hayami and his fellow central bankers triggered another jump in a yen that some analysts say is already threatening the recovery of the world’s second-largest economy.
In New York the yen zoomed to close at 104.87 per dollar, versus 106.38 Monday and nearing the 3 1/2-year high of 104.68 hit last week.
The bank’s decision also sent the Nikkei-225 stock index down 563 points, or 3.1%, to 17,369.78 by midday today. The index had jumped 2% on Tuesday ahead of the BOJ vote.
With overnight interest rates already close to zero in Japan, politicians argued that the central bank should run the risk of a small rise in inflation by printing more money.
The aims would be to further boost the economy and to reverse the yen’s almost 29% rise against the dollar in the last 13 months by enlarging the market supply of yen.
The robust yen--which in part reflects renewed investor interest in Japan--could choke off the nation’s recovery by raising the cost of Japanese imports in the United States and elsewhere. A strong yen also means foreign-generated profits are worth less when repatriated.
Every rise of 1 yen versus the dollar cuts Sony Corp.’s yearly earnings by 6 billion yen ($57.3 million), according to a Sony spokesman.
But the Bank of Japan refused to budge on Tuesday. On the positive side, analysts said the vote for the status quo enhances the reputation of BOJ Gov. Hayami as an independent operator, staring down attempts by government ministers to bully the central bank.
“For a long time [the BOJ] listened only to the Ministry of Finance and the government,” said Yasukazu Shimizu, economist at Nippon Credit Bank Research Institute Ltd. “It didn’t this time.”
The bank’s governors said in a statement that “foreign exchange rates themselves are not an aim of BOJ monetary policy.” The board also said it is already providing an “ample” supply of yen to keep interest rates low.
But the Japanese stock market has resurged in recent weeks in part on expectations for looser monetary policy and a weaker yen.
Likewise, yields on Japanese government bonds have slid since mid-August, also on expectations of looser money. Traders figured that a greater supply of yen would allow more investors to borrow short-term at rock-bottom rates to buy longer-term Japanese bonds.
The yield on the benchmark 10-year government bond fell to 1.68% on Tuesday, before the BOJ vote. It was near 2% on Aug. 25.
Still, “long-term yields won’t jump up, because the BOJ’s decision will push up the yen and hamper the economic recovery, which should be good for bonds,” said Akio Makabe, analyst at Dai-Ichi Kangyo Research Institute.
U.S. Treasury Secretary Lawrence Summers declined to comment on the BOJ decision. He said only that “the maintenance of sustained domestic demand-led growth is important for Japan and for the global economy.” He also reiterated that the U.S. favors “a strong dollar.”
Analysts said the BOJ is taking a calculated risk. “I don’t think they feel they’re at the end of their rope yet,” said Jonathan Basile, an international economist at Donaldson, Lufkin & Jenrette in New York.
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Japanese Stocks: Rally at Risk?
Japanese stocks have rocketed this year, but the Bank of Japan’s surprise decision Tuesday to balk at loosening monetary policy could hurt stocks in the near term, some analysts warn. How major Japanese stock mutual funds available to U.S. investors have fared:
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Assets Total return: Fund (millions) 1998 1999* Fidelity Japan Small Co. $1,075 +31% +178% Warburg Pincus Japan Small Co. 79 +13 +178 Fidelity Japan 574 +13 +81 Japan Fund 696 +24 +76 T. Rowe Price Japan 385 +9 +74 AIM Japan Growth B 79 nil +68 Morgan Stanley DW Japan B 196 +7 +43 DFA Japan Small Co. 153 +18 +35 Avg. Japan fund +8 +73 Avg. U.S stock fund +15 +7
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* Through Monday
Sources: Lipper Inc., Times research
