Japan’s Efforts to Avoid Recession, Comparison With Central Bank Activity and Focused Easing

Bank of Japan’s Expansion of Easing and Bank Funding, With other Central Banks

Japan’s economic indicators are showing weakness and expectation is Japan entering recession in Q4. Where European Union has slipped into technical recession, Japan seems next. Company revenues generally disappointed in Q3, though analysts moderated their projections through the quarter. In Q3, analysts also moderated their earnings projections. With revenue disappointing, considerable declines in earnings could be realized.

Real question is what catalysts exist to prevent recession in Japan and sustain demand, and therefore sales.

Countering Japan’s economic numbers are efforts of Bank of Japan. In September, Bank of Japan (BOJ) announced a 10T (Trillion) yen increase in its already existing asset purchase program, raising total easing purchases to a projected 80T yen.

This announcement was relatively concurrent with U.S. Fed’s September QE3 announcement consisting of $40B/month in mortgage backed security (MBS) purchases. European Central Bank also announced their Outright Monetary Transactions (OMT), which cooled Spanish and Italian yields.

Bank of Japan took further steps in October by raising their easing programs another 11T yen, to a total 91T yen. Where U.S. QE3 remains stable and ECB’s OMT remains untapped so far, BOJ is expanding their asset purchases.

Not only does BOJ have an expanding asset purchase program, but also exceptional funding for banks, similar to United Kingdom. BOJ has ear marked 66T yen for asset purchases and 25T yen for bank funding to promote lending.

BOJ’s Asset Purchasing Projections, Japan Market Responses and Other Central Banks

For BOJ’s asset purchasing, it is a diverse program which involves risky assets. According to BOJ’s description of its asset program, the bank has 39T yen earmarked for Japanese government bonds, not unusual. They have 19.5T yen reserved for Treasury Discount Bills, again not unusual.

What is of note, and according to BOJ information, bank is putting 3.2T into commercial paper. 2.1T into exchange traded funds (ETF’s) and .13T into equity issued by real estate investment corporations. Appears BOJ is taking equity stakes.

Interesting for BOJ’s approach is when they announced their enhanced easing in October, Japan’s major stock index, Nikkei 225, fell 1%. Of course concurrent worries of territorial disputes with China existed as with European issues. Still, long term prospects for BOJ’s balance sheet perhaps raised concern.

Contrasting is U.S. QE, which so far remains constricted to MBS’s. Also is ECB’s OMT’s, which remains confined to sovereign bonds of a country requesting assistance. It appears Spain has not made a request most likely out of protection of its sovereignty. Recent Catalonia elections, however, could force matters.

BOJ’s Measures to Promote Bank Lending, Covering Natural Disaster

BOJ also has two bank funding plans. Firstly is its “Growth Supporting Funding Facility” of 5.5T yen, increased in March by 2T yen and currently tapped at 3.4T yen. Then is BOJ’s loan promotion called “Stimulate Bank Lending Facility”, of some 19.5T yen.

Growth Supporting Funding Facility looks to be a rebuilding effort in Japan’s tsunami and earthquake devastates areas. Starting at 2.1T yen, BOJ announced in March an increase of 3.4T yen to a total of 5.5 T yen. BOJ Governor Shirakawa also announced relaxing program restrictions in order to reach smaller lenders and promotion of access to loans for medical providers. Loans under this program look to be .1% and require application review.

When this announcement was made in March, Japan stocks fell and yen rose against U.S. dollar. Apparent was market disappointment in BOJ not announcing other easing measures. But added easing certainly came in September and October.

Promoting Bank Lending on an Organic Basis, Like BOE’s Similar Efforts: Results Awaiting

Next bank funding mechanism for Japan is its “Stimulate Bank Lending Facility” announced in October. This facility appears to have 19.5T yen of ammunition (though “unlimited”) and is a funding facility tied to net bank loans. Much like BOE’s “Funding For Lending Plan”.

BOJ’s Stimulate Bank Lending Facility grows out of what Governor Shirakawa expressed in his November 12 speech in Tokyo. He said “The bank hears from many corporate managers that there are only a few attractive investment opportunities at home.”  Explaining cause for a proposed solution, Shirakawa offered, “Unless we somehow manage to change this view, it will be difficult to stimulate business investment.”

Program details appear rare. Still based on BOJ documents, it is tied to net Japanese bank lending, can be yen or foreign currency denominated.

Analogous is BOE’s Funding for Lending Plan, which started in August and is a collateral swap program. British commercial banks swap their previously authorized collateral for United Kingdom treasuries. Values of U.K. treasuries a bank may swap are tied to amount of new lending the bank undertakes prior to program expiration. Enforcing the program is a penalty fee imposed on a bank should their net lending fall below a baseline.

 

For England, and yet to be known by Japan, is British Banker’s Association reporting progressing increases in mortgage lending, and in the period of October over September. BOE is, however, saying that it is too early in program progress to know actual effects.

 

Currently, it looks that new easing measures among countries are becoming much more directed and focused on particularly weak areas. This contrasts with previous easing that generally tended to flood markets with cash. More precise measures looks to focus liquidity in a manner that increases direct investment demand and employment.