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BOJ's credit policy on debating table

TOKYO: As it tries to revitalise the economy by leaving huge sums of money in the banking system, the Bank of Japan has also left the market confused, some economists say.

For the past year, the central bank has repeatedly stated that its goal is to push short-term rates to zero.

But it has publicly rejected the more radical step of buying government bonds, a move that would mean printing money to help finance the government's massive budget deficit.

The BOJ and some economists say such a measure would not be effective and could sow the seeds of inflation when the economy picks up.

But some analysts contend the BOJ is secretly pursuing such a course. Others say the data does not prove this theory and some contend that bank is actually tightening the monetary base.

BOJ FOLLOWING, NOT LEADING, THE MARKET

Many economists say the BOJ's monetary policy is a straightforward response to market conditions.

These analysts see rises and falls in the monetary base as simply reflecting cash demand by the market and not the result of any covert policy action by the BOJ.

"Market conditions influence everything from growth in bank notes and the monetary base to the BOJ's balance sheet," said Yasushi Okada, chief economist at Economic Research Credit Suisse First Boston Securities (Japan).

The central bank has been providing large doses of liquidity to the banking system for the past few years, but with the economy struggling there is often no demand for cash even at no cost.

"The bottom line is that the BOJ can't force people to eat all the dishes put on the table," Okada said.

OTHERS SEE AN AGENDA

But others see the BOJ's actions reflecting a more active approach. They say the expanding balance sheet is a sign the central bank is quietly easing monetary policy further.

The BOJ's balance sheet expands when it buys more debt from the market in order to inject liquidity.

"The BOJ remains firmly opposed to a formal policy of monetising government debt and of formally announcing a quantitative easing, but both events are happening via the back door," said a commentary by Barclays Capital.

Since last year the markets have been closely watching the BOJ''s money market operations for signs of a backdoor easing.

"Speculation that the surge in the monetary base and the BOJ balance sheet was a sign of the BOJ monetising the budget deficit was clearly wrong," said Richard Jerram, economist at ING Baring Securities (Japan) Limited.

Some analysts who contend there is a "stealth" agenda say that the central bank now appears to be on a monetary tightening campaign that is harming the chances of a recovery.

Matthew Poggi, economist at Lehman Brothers, said a surge in the monetary base in December and January will begin to unwind in the February figures, a move that he sees as a de facto tightening in monetary policy.

Poggi predicts this will put pressure on the BOJ to adopt further easing steps as the exploding government debt becomes unsustainable amid a sluggish recovery.

Much of the controversy arises because standard theories of money expansion and economic growth can become ineffective when money ceases to have value.

In such a liquidity trap, the incentive to hold money diminishes because banks can always obtain almost cost-free funds.

Some market players blame the BOJ, saying that it's lack of clarity has been behind the market confusion, leading to fluctuations in bond prices and overall worries about the central bank's stewardship at a critical time for the Japanese economy.-Reuters