Japan to go down zero-rate road again

BOJ expected to cut rate today while it seeks to rein in power of yen

THE Bank of Japan appears set to cut interest rates today, returning in effect to the zero rate policy it pursued from 2000 to 2006 to counter deflation and to stabilise the Japanese financial system.

This time, Japan will join the US, where the Federal Reserve cut rates this week to near zero, and probably Britain where Bank of England deputy governor Charles Bean said yesterday that zero rates were possible.

Official warnings meanwhile grew louder in Japan yesterday of intervention by the BOJ in foreign exchange markets to stem the surge in the value of the yen, which yesterday hit a new 13-year high of near 87 yen to the US dollar. But such intervention could be neutralised by a tsunami of private capital now flowing back into Japan, analysts warned.

'We have conducted currency intervention in the past, and we will take appropriate measures, which includes that (option),' Japan's Chief Cabinet Secretary Takeo Kawamura said yesterday.

Japan's leading motor vehicle and electronics makers have already seen their profits savaged by the strength of the yen and yesterday chairman of the Japan Automobile Manufacturers Association Satoshi Aoki called for measures to restore stability in foreign exchange markets.

Japan has conducted intervention (via the Bank of Japan, acting as agent for the Ministry of Finance) on numerous occasions in the past when the yen was subjected to sudden and sharp appreciation. But some economists say that such a move now by Japan could trigger competitive currency devaluations elsewhere in Asia and beyond.

The BOJ's Policy Board will end its latest two-day meeting around midday today and is expected to announce a cut in the central bank's short-term overnight policy lending rate from its current level of 0.3 per cent to 0.1 per cent. This is in effect a zero interest rate level as dealers say it is difficult to hold the rate at precisely zero.

Such a move is not expected to have any measurable impact on Japan's economy, which is officially in recession and which is expected to continue contracting well into next year. But it would have the symbolic effect of signalling Japan's solidarity with monetary authorities that are pushing rates down to zero to counter deepening economic recession.

What Japanese authorities appear to be hoping for through a combination of cutting rates and launching a unilateral dollar-buying operation in foreign exchange markets is to deter speculation in the yen and to re-ignite the so-called yen carry trades which had pushed the yen down to very low levels until recently.

These carry trades, which involved hordes of Japanese and other speculators selling yen and buying assets denominated in higher yielding currencies and areas - thereby pushing the yen down - have reversed in the face of the story that has swept through global financial markets and some analysts doubt they can be re-ignited in the current climate of fear and volatility.

Recently, Japanese portfolio investors have begun to sell foreign assets and repatriate capital. This appears to be an actor behind the rise of the yen, in spite of the fact that foreign investors have been selling Japanese assets.

The Nikkei 2225 stock average (up some 0.6 per cent yesterday to 8,667.23) appears stable despite selling by foreign investors, indicating that Japanese investors feel safe now with yen assets, analysts say.

Bernanke may not stay in office to see fruits of his labour

Dated on 19-12-2008

(WASHINGTON) The fruits of Federal Reserve chairman Ben Bernanke's aggressive and unprecedented moves to fight off a major US recession may come too late to cement his legacy and ensure him a second term.

Mr Bernanke gets high grades from many analysts for recognising relatively quickly that the credit crunch spreading from defaulting mortgages to banks to businesses could have broader impact, and for taking bold measures in response.

'Once Bernanke realised how serious and severe his problem was, he moved quickly, and he moved aggressively,' said Bernard Baumohl, of the Economic Outlook Group in Princeton Junction, New Jersey.

In a Reuters poll, economists said the US central bank chief was early to acknowledge the scale of the crisis, especially when compared to his counterparts in Europe and Japan, and they gave his performance high marks.

Mr Bernanke looked prescient compared with European Central Bank president Jean-Claude Trichet who in July worried enough about inflation to raise rates, only to reverse direction three months later when the financial crisis intensified.

Perhaps no one has been better equipped to handle the crisis than Mr Bernanke, who studied how central bank complacency in the 1920s set the stage for the Great Depression, and whose speeches in 2002 and 2004 laid out a detailed map for monetary policy when a central bank's interest rate drops to zero.

On Monday, the Fed pushed on into uncharted terrain, dropping its benchmark interest rate to a range at or near zero for the first time and promising to keep rates low for a long time.

The central bank went further, promising to use untested weapons to boost growth as its conventional ammunition was spent. Mr Bernanke opened the door to expand purchases of debt issued and guaranteed by government-sponsored mortgage agencies and to buying longer-dated Treasury securities.

The response in markets was largely positive, with a rally in stocks on Tuesday, albeit followed by a fall on Wednesday, and a tumble in yields on longer- dated Treasury debt.

Mr Bernanke has said the Fed is willing to bypass banks and directly provide funding to specific market areas where activity has stalled, including consumer and small business loans. Commercial real estate may follow.

The Fed's moves are likely to foster private sector risk-taking and lead to appreciation of asset prices, fuelling a recovery, said Zach Pandl, an economist with Barclays Capital.

'Our view is that these policies will gain traction,' he said. 'We've been impressed with the speed and scale, and the Fed has rarely been behind the curve. We think they've been creative, nondogmatic.'

However, there is the possibility that the Fed's actions could backfire since the rate cut has lowered the value of the US dollar, and other countries may try to lower the value of their currencies to make them more stable, said Richard Bove, an analyst for Ladenburg Thalmann.

In addition, the Fed's rate cuts have failed to lower some private sector borrowing costs, Mr Bove said. 'The Fed is not impacting the private sector,' he said in a note to clients.

But most economists don't expect the economy to show signs of rebounding until the second half of next year.

Unemployment rates, which lag an economic recovery, may be peaking next autumn, right around the time the administration of current President-elect Barack Obama needs to announce whether they want Mr Bernanke to stay on for a second four-year term.

'If by fall of 2009 there's no improvement in the economy, and indeed, if it's even worse, I can see case being made for replacing the chairman of the Federal Reserve,' said Campbell Harvey, a professor at Duke University's Fuqua School of Business. 'Politically, you would have to shake the team up.'

Mr Bernanke's detractors also point to the decision in September to let Lehman Brothers fail as a serious error of judgment. Authorities including Mr Bernanke have said they could not find a buyer for the investment bank, but the event was seen as triggering an acceleration of the economic downturn.

Mr Obama's naming of former Treasury secretary Lawrence Summers, a highly regarded economist, to a senior White House economics coordination post also raises the possibility that the President-elect is grooming him to replace Mr Bernanke. -- Reuters