Japan CB plans steps to stabilise markets

Bank of Japan Governor Haruhiko Kuroda said on Monday the central bank will take necessary steps to stabilise markets jolted by the coronavirus outbreak, bolstering speculation about coordinated global policy action.

Kuroda’s comments, made in an emergency statement just days after a similar move by Federal Reserve Chair Jerome Powell, were welcomed by markets as a signal the world’s biggest central banks were mustering a coordinated response to the crisis.

Kuroda said financial markets have made “unstable movements” on heightening uncertainty over the impact on the economy from the epidemic.

Japanese companies slashed spending on plant and equipment in the December quarter, bolstering recession fears as the coronavirus outbreak and global slowdown pile pressure on the export-reliant economy.

Capital spending has been a bright spot in Japan’s fragile economy, the world’s third largest, driven by investment in urban development and labour-saving technology, automation and the high-tech sector to cope with labour shortages in the ageing society.

However, analysts said the momentum will wane as the coronavirus batters activity in China - Japan’s largest trading partner and the driver of global trade - cooling business confidence and hurting appetite for investment.

Capital spending (capex) fell 3.5 per cent in the last quarter from the same period a year earlier, Ministry of Finance (MoF) data showed on Monday, posting the first decline in 13 quarters and reversing from the prior quarter’s 7.1 per cent gain.

“The BOJ will monitor developments carefully, and strive to stabilise markets and offer sufficient liquidity via market operations and asset purchases,” he said.

The statement’s language suggested the BOJ will make full use of its existing tools to flood markets with funds, before pondering additional monetary easing steps.

Indeed, the BOJ subsequently offered 500 billion yen ($4.62 billion) in two-week funds via market operations. Investors also expect the central bank to ramp up daily purchases of exchange- traded funds (ETF) to put a floor on stock prices.

“Kuroda’s statement focused on market operations and asset purchases, which meant the BOJ may make its ETF buying more flexible to support stock markets or take steps to avoid money markets from tightening,” said Yoshimasa Maruyama, chief economist at SMBC Nikko Securities.

In his own unscheduled statement issued on Friday, Powell said the Fed would “act as appropriate” to support the economy in the face of risks posed by the epidemic.

Goldman Sachs’ economists Jan Hatzius and Daan Struyven said Powell’s statement “strongly hints” at an interest rate cut at or even before the Fed meets on March 17-18, as well as the likelihood of coordinated action.

“Chair Powell’s statement on Friday suggests to us that global central bankers are intensely focused on the downside risks from the virus,” Hatzius and Struyven said in a note.

“We suspect that they view the impact of a coordinated move on confidence as greater than the sum of the impacts of each individual move.”

Kuroda’s comments reinforced that view. Asian shares steadied from early losses on Monday as investors placed hopes on a coordinated global policy response to weather the damaging economic impact of the coronavirus epidemic.

But some analysts warned markets against betting too much on additional BOJ easing or globally coordinated rate cuts, given the dwindling tools some central banks have been left with.

Former BOJ board member Takahide Kiuchi said Kuroda’s statement was not a pre-announcement of an imminent easing.

“US, European and Japanese central banks could issue a joint emergency statement pledging to act against market turbulence,” said Kiuchi, currently an economist at Nomura Research Institute.

“That will probably happen before any joint interest rate cuts are pondered. In any case, I don’t think conditions have worsened enough yet for these things to happen.” The BOJ next meets for a rate review on March 18-19.

As of Monday, Japan had 962 coronavirus cases, including 705 from Carnival Corp’s Diamond Princess cruise liner, which was quarantined near Tokyo last month, according to the public broadcaster, NHK. The outbreak has heightened fears of recession in Japan as supply chain disruptions, slumping overseas tourists and event cancellations hurt an already fragile economy.

Prime Minister Shinzo Abe said the government will announce a second batch of measures around March 10 to prevent the spread of the virus and mitigate its damage to the economy. Any steps, however, will not involve big fiscal spending as Abe has repeatedly said the government will tap its 270 billion yen in budget reserves for now.

Reuters