The Bank of Japan is likely to face growing pressure to ease its monetary policy further as the aftermath of the Great East Japan Earthquake is expected to batter the nation's economy.
The Bank of Japan is likely to face growing pressure to ease its monetary policy further as the aftermath of the Great East Japan Earthquake is expected to batter the nation's economy.
On the other hand, the U.S. central bank, like its European counterpart, is now plotting an exit from the aggressive monetary easing program introduced in response to a sharp economic downturn triggered by the collapse of investment bank Lehman Brothers in 2008.
Widening differences in policy stance between the Japanese and U.S. central banks could have significant implications for yen-dollar exchange rates.
The BOJ kept its virtually zero interest monetary policy unchanged after its policy board meeting on April 28.
It maintained the target rate for the unsecured overnight call rate--a benchmark short-term interbank interest rate--at 0-0.1 percent a year.
The central bank also decided to keep the fund for purchasing financial assets to pump money into the economy at 40 trillion yen.
At the April 28 meeting, Deputy Governor Kiyohiko Nishimura proposed that the asset purchase fund be increased to 45 trillion yen, saying credit should be relaxed further to funnel more money into the financial system.
Other policy board members opposed and Nishimura's proposal was voted down. But the BOJ could decide on additional monetary-easing measures at its next policy board meeting scheduled for May 19-20, at the earliest, depending on economic conditions.
At an April 28 news conference, BOJ Governor Masaaki Shirakawa pointed to the possibility that the central bank will discuss additional money-easing measures at the next policy meeting or later.
"We are ready to take appropriate measures if necessary," Shirakawa said.
In a surprise move at the BOJ policy meeting, Nishimura reportedly argued that the central bank should act to prevent the lingering effects of the March 11 earthquake from hurting the economy by causing consumer and business confidence to crack.
Nishimura's call was the first such proposal from a BOJ deputy governor since the new BOJ law was put into effect in 1998. It is extremely rare that a BOJ deputy governor voices a policy view that is not fully in accord with the chief of the central bank.
Many analysts regard Nishimura's unusual action as a hint that the central bank's top policymakers are considering additional credit-easing measures.
Yasuhide Yajima of NLI Research Institute predicts that at its next policy meeting in May, the BOJ will discuss policy options for further easing, focusing on the expansion of its asset-purchase program.
Hideo Kumano, economist at Dai-Ichi Life Research Institute, concurs, saying that the BOJ has indicated the possibility of additional easing in case it becomes clear that the disaster will have major impact on the economy.
Senior BOJ officials did not reject such views.
Almost at the same time, the U.S. Federal Reserve Board took a small step in the opposite direction.
In the afternoon of April 27, Ben Bernanke became the first Fed chairman to hold a news conference after a meeting of the federal open market committee, which sets the central bank's monetary policy, when he took the microphone at the Fed's headquarters in Washington.
At the news conference, Bernanke made it clear that the Fed will terminate its program to purchase $600 billion (about 49 trillion yen) of Treasury bonds at the end of June, as scheduled. The program, known as QE2, or the second round of quantitative easing, was designed to inject liquidity directly into the economy.
As for how the Fed will start unwinding its colossal monetary stimulus, Bernanke said, "it's very likely that an early step would be to stop reinvesting all or part of the securities that are maturing."
In early April, the European Central Bank began to turn off the tap by raising its benchmark interest rate by 0.25 percentage point from 1.0 percent, where it had been since the spring of 2009.
Both the European and U.S. central banks are acting in response to growing concerns about inflation. Their policy stances are getting increasingly different from the BOJ's.
A growing number of market players are now betting on a gradual decline of the yen against the dollar in the coming months.
While the Fed will maintain its "zero interest" policy for the time being, a rate increase next year is now in the cards.
In contrast, it is widely predicted that interest rates will remain on a downward trend in Japan, where the central bank is tilting toward additional easing.
The situation is likely to prompt many investors to pile into dollars to take advantage of higher interest rates in the United States, causing the greenback to climb against the Japanese currency.
"The yen will slowly become weaker (against the dollar) in the medium-term," said Mizuho Corporate Bank market economist Daisuke Karakama.
Currently, the dollar is trading at around 81 yen. Some foreign exchange dealers are looking for the dollar's rise to the 85-86 yen level in the next month.
But the dollar could come under selling pressure again if the U.S. economy fails to stage a solid recovery.
Since export growth is vital for the Japanese economy's recovery from the damage inflicted by the disaster, a weaker yen, which boosts the international price competitiveness of Japanese exports, could be a big boon to the nation's economic well-being.
A sharp fall of the yen, however, could have harmful effects on the economy by causing rises in the import prices of materials needed for reconstruction.
The yen's exchange rates against other major currencies could greatly affect Japan's post-disaster rebuilding.
(This article was compiled from reports by Toru Hatanaka, Toshihiko Ogata and Kazuo Teranishi.)