A flurry of excitement in the markets today after the Bank of Japan’s announcement of a surprise unscheduled policy board meeting (no doubt fuelled somewhat by newswires’ insistence on describing such gathering as “emergency meetings” although they aren’t). With deflation entrenched and the yen’s rise against the dollar worrying exporters, speculation swirled that the BoJ was about to announce a return to “quantitative easing” or at least an increase in its government bond-buying programme. So when all the policy board did was to make a sideshow offer of cheap three-month loans to commercial banks, the sense of anti-climax was palpable.
In fact, the whole show looks pretty much like political posturing. With Japan’s new Democratic party government under increasing fire for its lack of an obvious economic policy or clear fiscal direction, ministers have been increasingly trying to shift attention over to the BoJ, and in particular to its failure to act decisively against the return of deflation. So Masaaki Shirakawa, BoJ governor, has good reason to want to be seen to do something, even if that something is pretty irrelevant.
The result is an extension of the phony war posturing referred to elsewhere in this blog. The question is whether the BoJ’s willingness to respond to pressure on a symbolic level will encourage the politicians to push for more substantive measures. But then it’s not at all clear that there is consensus within the DPJ government on what it actually wants. After all, if it really wanted to change BoJ direction, why would it propose a status quo candidate for the policy board?