A Forex View From Afar

Ahead Of The BoJ

Tonight, the financial markets await the Bank of Japan to present its latest monetary policy decisions, or better said, the bank’s way of aiding the economy without using conventional monetary policy.

The BoJ’s overnight call rate is already at unusual low levels, 0.10%, something that leaves the central bank’s hands tied, unable to use monetary policy to stimulate the economy. As such, the central bank will try to kick-start the economy using less conventional methods, such as buying corporate debt and buying shares from the main Japanese banks.

Earlier, the bank said it would use up to $11.0 billion in order to buy publicly traded shares held by local banks, and another $33.0 billion to buy corporate bonds. The two decisions would theoretically strengthen the Japanese financial system, first by consolidating the bank’s balance sheets and increasing liquidity, and secondly it will bring down the spreads on corporate bonds.

The Japanese financial system is heading towards a demanding period, the end of the fiscal year, on March 31. Usually, around this time of year, the liquidity in the financial system dries up, something not beneficial for the economy. The lack of credit, and thus liquidity, stemmed from the credit crunch, together with the end of the fiscal year will put additional strains for the economy.

The fourth quarter GDP contracted 3.3%, the most since 1974 and a couple of times more than its U.S. or European counterparts. According to the BoJ forecasts, the economy is expected to contract in the following two years. Most analysts agree that, Q1 and Q2 might be even worse than the last quarter, something that would demand even more action from the BoJ.

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