Raw Japan

Slices of Japanese business, politics and life

What can the Bank of Japan do?

January 20, 2009

Japanese interest rates have already dropped to just 0.1 percent, leaving the Bank of Japan with few traditional weapons to fight its corner of the global financial crisis as it meets on Wednesday and Thursday this week to review monetary policy.

It could, of course, return to zero interest rates, but Japanese policymakers are not convinced that this worked last time they tried it and, with rates already so low, how much difference would moving to zero make?

BOJ governor Masaaki Shirakawa

As Hideyuki Sano writes in our preview of the BOJ’s policy board meeting this week, Governor Masaaki Shirakawa and his advisers are more likely to consider less traditional ideas that are increasingly the weapons of choice for central banks, such as buying commercial paper from otherwise strong companies that can no longer raise funding themselves in gummed-up markets.

The BOJ’s policy could increasingly resemble that of the U.S. Federal Reserve, which has expanded its balance sheet with various securities from markets.

The numbers are not pretty. Industrial output fell 8.5 percent in November alone, and that matters a lot in a country where big manufacturers such as Toyota, Nissan, Sony, Panasonic and so on employ millions directly and indirectly.

Big firms are slashing investment and laying off temporary workers (and some companies a few permanent ones too) as the yen rises on investors’ view of Japan as a relatively safe place to park their cash amid the global meltdown.

Will the BOJ go a bit further and buy longer-term corporate bonds to keep hard-pressed firms afloat?

Or is it time for the Japanese government to step up to the plate with faster, fiscal stimulus to rescue an economy the central bank warns may shrink for two years in a row?

The problem for Japan is that the government has its own woes: Tokyo is heavily indebted, and the prime minister is deeply unpopular and distracted by growing unease in his own party.

Akubi factory

Japanese companies traditionally hang on to their workers for life, but as correspondent Yoko Nishikawa found when she went to central Japan, the home of Toyota, to write this story, the pain is real and goes well beyond the big numbers such as a 42 percent fall in Japan’s main share index last year.

“When Toyota sneezes, everyone catches a cold,” said Toshiharu Nakano, a kimono retailer in Nagoya.

“Nowadays, we only get faxes that show a decline in orders,” said Sumiko Takeuchi, the president of a small firm that makes car parts.

Temporary workers have been particularly hard hit. They make up around one-third of the Japanese workforce and are the first to go when times get tough.

Hundreds of them spent the New Year holidays camping in a Tokyo park and demanding jobs.

It’s these temporary workers and smaller firms that are most at risk in Japan, and polls show few have confidence in the government to help them. Answers on a postcard, anyone?

Photo credits:
– Bank of Japan Governor Masaaki Shirakawa ponders over a question during a news conference at the central bank in Tokyo, December 19, 2008 — the day the BOJ cut its key policy rate to 0.10 percent. REUTERS/Yuriko Nakao
– An employee works at Takeshiro Kogyo Co., a subcontractor making parts for Toyota cars in Akubi Town, central Japan December 25, 2008. REUTERS/Issei Kato

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