BOJ's Mizuno: Must Be Prepared to Act Promptly

Bank of Japan Policy Board member Atsushi Mizuno said on Thursday the central bank should be ready to swiftly implement what may be seen as abnormal policy steps as the already-fragile economy appears to be making a hard landing.

Japan, the United States and the euro zone are all in recession and seem to be facing a protracted downturn due to the worst financial crisis in more than 60 years.

"It's not too much to say falling exports are triggering a downward spiral of production, incomes and spending," Mizuno said in a speech to business leaders in Gifu, central Japan.

Mizuno said the BOJ, which is already guiding its overnight interest rates near zero and has been buying corporate debt, should study ways to lower term interest rates, meaning lending beyond overnight funds such as for periods of three months.

As the economy is quickly deteriorating, investors and banks have been nervous about lending to each other, keeping the benchmark three-month interbank rate above 0.70 percent, or about 0.6 percentage point above the BOJ's 0.10 percent target rate for overnight money.

BOJ officials including Deputy Governor Kiyohiko Nishimura have recently suggested that their next policy effort will likely be focused on term interest rates.

"The important issue towards the financial year end (in March) is whether the BOJ will lean towards adopting operations aimed at lowering longer-term interest rates including term instruments," said Naomi Hasegawa, senior fixed-income strategist at Mitsubishi UFJ Securities.

"Mizuno pointed that out, and taken together with Deputy Governor (Kiyohiko) Nishimura's speech last month, the BOJ board members share an awareness of the issue and they are likely to tackle it as a key point in the next policy meeting this month."

In recent months, the BOJ has taken various unconventional steps to support the economy, which has taken a beating as global demand has evaporated since late last year.

Dusting off a scheme it implemented in 2002-2004 to head off a domestic banking crisis, the BOJ pledged this week to buy up to 1 trillion yen ($11 billion) in stocks held by Japanese banks to help reduce their exposure to share market fluctuations.

That follows the bank's moves in the last few months to buy corporate bonds and commercial paper to ease a severe funding squeeze that threatens to deepen the recession.

Mizuno also said there was a risk that the economy could fare worse than the central bank's already bleak projections.

Last month, the BOJ warned that the economy would contract for this fiscal year ending in March and next fiscal year as well and face its second bout of deflation this decade.

Mizuno said household consumption could slump further if manufacturers shed more jobs to protect themselves from unprecedented falls in exports.

As consumers around the world tighten their purse strings, Japanese manufacturers, the engine of the country's economy, have slashed production at a pace not seen before -- and that trend has so far showed no sign of letting up.

Preliminary GDP figures due on Feb. 16 are expected to show Japan's economy shrank 3.1 percent in the last three months of 2008, or an annualized slide of 11.8 percent.

Japanese companies, traditionally reluctant to cut staff, have been shedding jobs, so far mostly in lower-paid, nonregular positions, pushing the jobless rate up to a three-year high in December.

Growing worries about job security are weighing on personal consumption, even though Japan has not had the sort of excesses in the housing and mortgage markets that the United States and many European countries are grappling with.

Mizuno, a former bond strategist with knowledge of the hedge fund industry, also said there was a view that some hedge funds could fail or face more fund withdrawals by their investors, which could disrupt Japanese financial markets.

Japan's Nikkei 225 Average hit a 26-year intraday low in October.

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