Bank of Japan to closely monitor financial markets amid Evergrande woes

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The Bank of Japan will closely monitor developments in financial markets recently shaken by concerns over a potential default by China’s leading real estate developer Evergrande Group, Governor Haruhiko Kuroda said on Wednesday.

On the same day, the BOJ kept its super-easy monetary policy intact to help the economy overcome obstacles to tackle COVID-19 and supply chain disruptions in Southeast Asia.

“The Bank of Japan will continue to closely monitor any changes in market opinion on the debt issue and its impact on global financial markets,” Kuroda said at a press conference after a two-day meeting on policy development.

A photo taken in June 2019 shows the headquarters of the Bank of Japan in Tokyo. (Kyodo)

Japanese stocks, which had risen sharply on expectations of further stimulus under a government due to be launched following the resignation of Prime Minister Yoshihide Suga later this month, fell on Wednesday, the stock index Nikkei at 225 issues ending at its lowest level since September 3.

Investors are on the alert for the possibility of spillover effects which they believe could lead to another financial crisis, but Kuroda has dismissed concerns about spillover effects at this point.

“It is appropriate to see this as a problem related to the company concerned and also to the Chinese real estate sector,” Kuroda said, noting that the development came after years of rapid expansion of the sector.

“We will continue to monitor the development of the Chinese economy,” Kuroda said.

At the end of the policy-making meeting, the BOJ stuck to its overall assessment of the economy as recovering even in a “serious” situation. But he recognized the impact of supply side constraints on exports and industrial production, the main engines of the world’s third-largest economy.

In a widely expected move, the Japanese central bank decided to keep short-term interest rates at minus 0.1% while continuing to steer 10-year Japanese government bond yields around zero percent in order keep borrowing costs low for businesses and households. In addition, it will continue to buy exchange-traded funds as needed, with its annual limit at 12 trillion yen ($ 110 billion).

The BOJ meeting took place a week before the ruling Liberal Democratic Party elects its new chairman, who will almost certainly become the next prime minister of Japan, Yoshihide Suga’s current term as LDP leader expires at the end of this month.

Four candidates in the LDP race recognize the need to maintain crisis-mode support for the pandemic-affected economy, with financial markets looking for any hint of change from “Abenomics,” which heavily rely on monetary easing bold and fiscal stimulus.

“Exports and industrial production have continued to increase despite some exports and production being affected by supply side constraints,” the BOJ said in a post-meeting statement.

The Japanese economy has “picked up as a trend” and is expected to recover as the impact of COVID-19 wanes and vaccinations increase, although economic activity, primarily in the service sector, is growing. for the moment lower than before the pandemic, according to the statement.

Japan’s central bank has said it will continue to support businesses struggling with the pandemic fallout so that they can access financing needs.

The spread of the highly contagious Delta variant of the new coronavirus has forced the Japanese government to place prefectures with a relatively high number of infections under a state of emergency.

The current statement is due to expire on September 30 and the government is considering lifting it partially or fully, government and ruling party sources said on Tuesday.

Shedding a veil over the prospects for a manufacturer-led recovery, a global semiconductor shortage and plant shutdowns in Southeast Asia due to the spread of COVID-19 have made it difficult for companies. Japanese automakers, including Toyota Motor Corp. and Honda Motor Co., to secure enough parts, leading to clean production cuts.

Soaring material costs are another headache for Japanese companies as they seem reluctant to pass them on to consumers by raising prices, which would reduce their profits. The recent sharp increases in wholesale prices have not yet translated into higher consumer prices in Japan.

The BOJ contrasts sharply with the US Federal Reserve, which is expected to start reducing its asset purchases as early as this year. Financial markets are trying to find out when the US central bank will start raising interest rates.

In rallying support, LDP candidates are prioritizing the response to the coronavirus, a major concern of the Japanese public, and BOJ observers say the central bank would maintain its accommodative policy as its 2% inflation target is become all the more elusive.

Vaccination Minister Taro Kono, a leading candidate in media polls, said meeting the 2% inflation target would be “very difficult” under current conditions, but added that monetary policy should be left to the central bank. Another candidate, Fumio Kishida, a former foreign minister and long considered a fiscal hawk, believes the 2% target is a “global standard” and should be maintained.

Former Minister of Communication Sanae Takaichi, close to former Prime Minister Shinzo Abe, wants to rely on the Abenomics.

Years of aggressive easing have failed to bring the BOJ closer to the inflation target, and Japan’s consumer staples prices, excluding volatile fresh food, an indicator of inflation, fell for the 12th consecutive month in July.

After the policy meeting, the BOJ unveiled the disclosure requirements for financial institutions seeking to receive zero-interest funds for their loans and investments to tackle climate change under the central bank’s new program. Information on governance, as well as the objectives and results of funds spent, should be communicated.


Associated coverage:

China Evergrande agrees to pay coupons on bonds due September 23

LDP presidential candidates promise to double spending on children

Key Tokyo stock index posts biggest drop in 3 months amid real estate fears in China



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