Daunting would be one word to describe the task ahead of the Bank of Japan to reflate the Japanese economy, halt the appreciation of the yen and promote economic growth.
The Bank said it would guide the overnight call rate at a range of zero to 0.1%, against the previous target of 0.1% per cent. It also pledged to keep rates effectively at zero until prices were seen stabilising.
It could be years if it doesn’t work quickly.
And it will buy around $US60 billion of bonds and other securities to try and lower interest rates and the cost of other assets and try and encourage more activity in the economy.
The markets didn’t care about the difficulties associated with the move, traders just wanted to buy. The yen was pushed lower for a while, but it then rallied.
Equities higher in Tokyo for a second day as Asian shares hit a 26 month high and the gold futures topped the $US1,351 level for the first time in trading overnight.
While daunting is a good call, impossible would be harsher judgement, but the move to cut rates and buy more bonds and other securities, does look heroic.
The central bank already has made tens of billions of dollars of cheap loans to various sectors of industry in a program that started in December 2009, and there’s been little discernible impact.
The economy is in a hole, and it’s probably no secret that the stockmarket index that tracks the value of the country’s listed banks, fell to an all time low this week.
The question unanswered in all of this is, how can you make companies and individuals borrow more if rates fall, if they haven’t been able to see a reason to do so already?
Money has been cheap in Japan for years and banks are finding it tough to attract new business. Big companies are borrowing directly from the markets, not their usual banks.
Japan is an aging country and saving retirement income is more important to individuals than borrowing, spending it and consuming.
So just look at what the Bank of Japan is up against:
Consumer prices have fallen most years since 1998, and the Japan’s population is contracting in size, having started falling in 2006.
The Yen is up 11% against the US dollar so far this year, which threatens the already faltering recovery from the country’s deepest postwar recession.
Industrial production remains weak and fell for a third month in August, as exports eased the trade surplus fell for the first time in 15 months.
Retail sales growth is fitful; unemployment remains high by Japanese standards (well over 5%) and economic growth halved in the June quarter to 1.6% annual.
And in its statement on Tuesday, the Bank of Japan admitted that "economic growth rate is likely to be somewhat lower than expected."
While the bank is due to review its forecasts later this month that seems to be a formality after Tuesday’s admission that the economy is slowing and sliding faster than expected.
In that statement, the central bank said "Although Japan’s economy still shows signs of a moderate recovery, the pace of recovery is slowing down partly due to the slowdown in overseas economies and the effects of the yen’s appreciation on business sentiment.
"While the economic outlook will be examined in the Outlook for Economic Activity and Prices at the next Monetary Policy Meeting, mainly due to the waning effects of demand-boosting policy measures, the pace of economic improvement is likely to slow for some time before returning to the moderate recovery path.
"Comparing with the outlook presented in the Bank’s July interim assessment, the economic growth rate is likely to be somewhat lower than expected.
"In addition, amid heightened uncertainty about the future, especially for the U.S. economy, attention should still be paid to downside risks to Japan’s economy.
"While the year-on-year decline in the CPI (excluding fresh food) has been slowing, a possibility that weaker-than-expected economic activity will affect price developments requires vigilance.
"Given those circumstances, it has become more likely that the return of Japan’s economy to the sustainable growth path with price stability will be delayed."
In other words, the economy is not healthy, so instead of trying to kick start a sluggish or moribund economy gripped by deflation, the Bank of Japan has to first stabilise activity (the Government is next to useless) and then try and get inflation out of the box, yields on rates down even further (but that will slash income on domestic savings, such as the vast holding of Japanese Government bonds) and trying to resurrect consumer demand (business investment is reasonably solid, but slowing).
To do this the bank said it was making "clear that it is pursuing the virtually zero interest rate policy."
"Second, the Bank confirms that it will maintain the virtually zero interest rate policy until it judges that price stability is in sight and that the "understanding of medium- to long-term price stability" is the basis for the judgment.
"Third, taking into account that there is little room for a further decline in short-term interest rates, the Bank will encourage the decline in longer-term interest rates and various risk premiums to further enhance monetary easing.
"It is an extraordinary measure for a central bank, particularly the purchase of financial assets to
