Wednesday, 10 November 2010

BoJ says Japanese recovery pausing

Even before the Federal Reserve announced its latest plan last week to inject monetary stimulus in the United States economy by buying Treasury securities, the Bank of Japan had already announced its own asset-buying plan in the face of a slowing economy.

On 5 October, the BoJ had announced that it would establish an asset purchase programme in an attempt to stimulate the economy. The programme would involve the purchase of 35 trillion yen worth of assets, including 5 trillion yen of risk assets such as exchange-traded funds and real-estate investment trusts. Details of the programme were announced on 28 October and 5 November.

In its statement following the monetary policy meeting on 5 November, the BoJ said that the Japanese economic recovery "seems to be pausing". This assessment was repeated in its monthly report for November published on Monday.

The BoJ assessment is a downgrade from that in its October report, when it said that that the pace of recovery was "slowing down". It also follows the assessment in the Cabinet Office's October economic report, which had said that the economy appears to be "pausing recently".

In any case, economic reports over the past two days substantiate the BoJ's latest assessment.

On Monday, the Cabinet Office reported that the composite leading index for the Japanese economy fell to 98.9 in September from 99.5 in August. This was its third consecutive month of decline. The composite coincident index fell to 102.0 in September from 103.3 in August. This was its first decline since March 2009.

On Tuesday, the Cabinet Office reported that the diffusion index for current conditions derived from its economy watchers survey fell to 40.2 in October from 41.2 in September. This was its third consecutive monthly decline. The diffusion index for future conditions also fell to 41.1 in October from 41.4 in September.

To a large extent, the weakness in the Japanese economy is the result of weak exports. On Tuesday, in its report on Japan's balance of payments, the Ministry of Finance said that exports grew 15.9 percent in September from the year before, down from a 16.5 percent increase in August.

Exports appear to have peaked in July. On a seasonally-adjusted basis, exports in the third quarter were 2.5 percent less than in the second quarter.

While clearly aware of the on-going trend, the BoJ does not seem overly alarmed. In its last monetary policy statement and its latest monthly report, it added that while the economy "is likely to grow at a slower pace for some time", it "is expected to return to a moderate recovery path thereafter".

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