Japan moves to fight rising yen, announces stimulus
Monday, August 30, 2010; 11:27 PM
TOKYO - Attempting to combat the rising yen that analysts have blamed for slower export growth and a sputtering economy, Japan on Monday announced two measures: Its central bank will expand its lending program and the government will implement a $10.9 billion stimulus package.
The stimulus, which had been forecast for weeks, will be formally approved Sept. 10 and take effect next month. Prime Minister Naoto Kan disclosed only the basics of the plan Monday but said it will target employment help for young job-seekers, investment in green industries and aid for small businesses. The stimulus aid will come from a pool of unspent money from the 2010 budget.
Economists say the plan's modesty reinforces the degree to which Japan is hamstrung by its public debt - about twice the size of its gross domestic product - as it tries to revive its economy, the third-largest in the world. The government is reluctant to spend too much or issue more government bonds for a larger stimulus package. But in the meantime, export growth is slowing, undermining the foundation of an export-reliant economy.
"We want to take swift measures with the two pillars of this stimulus and the monetary easing the [Bank of Japan] decided today," Kan said.
Both Kan and Japan's central bank have been criticized in recent weeks as having a slow response as the yen surged to a 15-year high, measured against the dollar. A rising yen increased the price of Japanese exports, hurting corporations such as Sony and Toyota.
Accustomed to having one of the world's highest growth rates in the 1970s and 1980s, Japan has since seen two lost decades, with fears of a third now emerging. Japan's economy grew at just 0.1 percent in the second quarter this year, less than expected. And correspondingly, Japan's economy - which had been the world's second-largest since 1968 - was surpassed by China.
Kan's announcement followed an earlier Bank of Japan emergency meeting in which the bank's board agreed to offer financial institutions 10 trillion yen in six-month loans. This, coupled with the three-month loans (worth 20 trillion yen) that were implemented late last year, now gives banks access to 30 trillion yen - or about $355 billion - at a rate of 0.1 percent.
Given the government's restricted ability to aid Japan's economy with spending, the bank has faced political pressure this month to limit the yen's rise and boost liquidity.
The Bank of Japan said in a statement that it "recognizes that Japan's economy faces the critical challenge of overcoming deflation and returning to a sustainable growth path with price stability." It added: "The Bank believes that the monetary easing measure, together with the government's efforts, will be effective in further ensuring Japan's economic recovery."
Analysts and the markets were underwhelmed by the central bank's measures. After the announcement, the yen strengthened - rising to 85.12 against the dollar. The Nikkei index, meanwhile, lost its early morning gains following the announcement. For the day it rose 1.76 percent.
"The BOJ measures were pretty much as expected," said Edwin Merner, president of Tokyo's Atlantis Investment Research. "It helps a little bit - if it's followed by government action. The government could be adding measures that don't cost anything. Cutting taxes. Guaranteeing loans for overseas contracts. They could do those things. But they're not."