Japan’s Central Bank Cuts 2 Key Interest Rates on More Bad News
With time and options running out and more bad news piling up, Japan’s central bank cut two key interest rates nearly to the vanishing point Wednesday in a feeble attempt to put a floor under the sagging economy.
“It doesn’t really do very much,” said Garry Evans, strategist with HSBC Securities. “What’s a tenth of a percentage point between friends?”
In fact, the Bank of Japan doesn’t have a lot of friends these days. What it does have is a mountain of problems that include a sagging stock market, staggering banking system, political turmoil and a parade of weak economic data.
These factors pushed the central bank to lower Japan’s official discount rate, the rate it charges banks to borrow money, to 0.25% from 0.35%, and its overnight rate target, the rate banks use for borrowing among themselves, to 0.15% from 0.25%.
The rate cuts followed news that industrial production in Japan declined a whopping 3.9% in January, surprising even pessimistic analysts who expected it to be flat or to show a small decline.
Meanwhile, early today the benchmark Nikkei stock index hit a 15-year low of 12,660, surpassing the 1990s low of 12,879 reached in 1998. On Wednesday the Nikkei had fallen 1.4% to 12,883.54.
Last week Japan reported its first monthly trade deficit since 1997, signaling that exports, one of the few previous bright spots, were also on a respirator.
“We’re at the edge of the cliff,” said Tomoko Fujii, senior economist with Nikko Salomon Smith Barney. “And there’s no strong political leadership in this difficult time.”
As if all that weren’t enough, economists say a new adversary threatens to take a leading role: outright fear. With the stock market falling to levels not seen in nearly a generation and U.S. markets and confidence slipping, experts fear that panic, reduced corporate earnings and the exercise of financial instruments known as derivatives could spur further sharp equity declines.
Certain derivative products held by life insurers and other institutions, which are designed to hedge their risk, require their holders to sell stocks when the Nikkei falls below about 12,600.
The future direction of the Japanese stock market has several real-world implications. Japan’s fiscal year ends March 31 and solvency for many struggling companies depends on their being able to value their stock holdings at certain minimum prices. Wobbly banks, meanwhile, will almost certainly see a surge in nonperforming loans. And already-battered consumers could skulk further into penny-pinching mode as more gloom spreads at home and abroad.
“I’m really worried about the future,” said Taeko Sugimoto, a 63-year-old housewife and stockholder. “And the U.S. Nasdaq continues to slide, pushing down Japanese stocks. It’s pretty scary.”
Ever-optimistic government planners point out several reasons why things may not be as bad as they look. The January industrial production number is always a bit of a wild card with a string of Japanese holidays that tend to skew the data. And the Nikkei stock index was revamped last year, so a direct comparison with the 1985 figure is not fair, they point out. In fact, the old index would be 2,000 points higher.
Still, people reading the headlines don’t appreciate those subtleties. Furthermore, the government’s apparent willingness to soft-pedal many problems, repeatedly forecast a self-sustaining recovery that doesn’t materialize and put off real structural change arguably explain the length and duration of Japan’s downturn, some economists say, leading to what has been dubbed Japan’s “lost decade.”
The government is running out of options. In the last few weeks, it’s delayed some accounting changes to blunt the impact of stricter rules governing bad debt write-offs. It’s announced some rule changes allowing companies to buy back their own stock. And Wednesday’s interest rate cuts are aimed at helping the weakest banks and companies.
But with rates already close to zero, their effect is limited even as the problems keep growing. “It’s a pretty tired array of weapons to try and get them through” the fiscal year, said Chris Calderwood, chief economist with Jardine Fleming Securities. “We’ll see all sorts of bankruptcies in the first week of April as the living dead are brought out.”
One dire option still remaining is government stock purchases, a move it has signaled it might consider if the Nikkei hits 12,000. It also could recapitalize the banks again. Still, these amount to more patches, and the desire to avoid any sort of pain, job cuts or bankruptcies at almost any cost is starting to frustrate even ordinary Japanese who will arguably be hurt in the short term.
“My overtime has been cut in half and my spending has been squeezed,” said Atsushi Takimoto, a 39-year-old employee in the construction industry. “Still, the government needs to stop doing these little surface tricks and get down to some more robust reform. Unfortunately, there’s no one around who seems to be able to do it.”
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Hisako Ueno in the Tokyo bureau contributed to this report.
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Back to the ‘80s
Japan’s Nikkei-225 stock index sank to 12,883.54 on Wednesday, just a sliver above its 1990s low. Falling through that mark would return the Nikkei to mid-1980s levels.
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Nikkei stock index, yearly closes and latest
Wednesday: 12,883.54
Source: Bloomberg News
