TOKYO (AFX-ASIA) - ING Baring Securities Japan chief economist Richard Jerram said the belief that the Bank of Japan was leaving recent currency intervention unsterilised has proven premature as the bank quickly mopped up liquidity after end-September. The bank has demonstrated its innate conservatism by only allowing liquidity to build up during a traditional period of increased demand for funds ahead of the fiscal half-year end last month, he said. Hopes that the bank would leave additional funds in the market and this would herald a shift towards a more radical approach to monetary policy have proven to be unfounded, he added. Sterilisation involves mopping up the excess liquidity that is pumped in the money markets as a result of intervention, though there is little to distinguish this from the regular money market operations of the central bank.
"The sudden rise in current account balances at the BoJ at the time of foreign exchange intervention to weaken the yen led to claims that the intervention was not being sterilised," Jerram said in a note. "However, it appears that the increase in liquidity was simply to prevent systemic problems over the fiscal half-year end and the BoJ is now draining. It seems that the intervention was sterilised." The latest figure given by the bank for the balance of current accounts, as of yesterday, is 8.77 trln yen. It began to mop up excess liquidity as early as Monday, the first trading day after the end of the fiscal half.
"The bank decided to target the current account to be over 6 trln yen in September and so the Bank is continuing to do that," bank spokeswoman Mari Sone said at the time. "It's not a big drop, but the bank didn't offer to do an operation today, and that's naturally the result." At its last policy meeting September 18, the BoJ targeted a level for the balance of "more than" 6 trln yen, though it rose to over 12 trln yen during the period when the bank was carrying out recent forex interventions.
Jerram said the central bank's intervention against the yen was helped by the perception that the action was unsterilised. "Presumably the BOJ was in no hurry to dispel the misapprehension that it was leaving intervention unsterilised," he said. "The belief that intervention was unsterlised ... could have helped to increase its effectiveness, as it implied a more radical BoJ approach."
In contrast, Jerram said the bank's moves since then provide "further evidence of the inherent conservatism of the BoJ" in the face of the fall out from the recent attacks on the US. "Central banks around the world are showing a readiness to trade a medium-term inflation risk in return for short-term systemic stability. The BoJ has done as near to nothing as it could," he said. Finance Minister Masajuro Shiokawa said yesterday that the ministry will ask the Bank of Japan to maintain the balance of current accounts held at the bank at above 8 trln yen.
"I think the existing stance on monetary policy is very good and we want the bank to maintain its balance of current accounts at high levels, even though the end-September first-half earnings period has passed," he said.