TOKYO: The Bank of Japan will pledge on Monday to supply as much money as needed to keep a massive earthquake and tsunami that struck the country's northeast from destabilising markets and its banking system.
The central bank will not cut its policy rate, already too low at 0-0.1 percent, like New Zealand's central bank did last week following an earthquake.
But it will signal its readiness to ease monetary policy further if the damage from the worst quake since records began 140 years ago threatens a fragile economic recovery. But for now, it looks certain to stand pat on policy and focus on assessing the disaster's economic impact.
The BOJ cut a planned two-day policy meeting to one day to respond promptly to the 8.9 magnitude earthquake and a 10-metre tsunami that struck Japan's north eastern coast on Friday.
Radiation leaked from a nuclear plant in Fukushima, but despite the risk of the world's worst nuclear disaster in 25 years, the impact on the economy was still uncertain.
The BOJ' immediate priority is to ensure commercial banks in quake-struck regions do not run out of cash in case depositors rush to withdraw money. It will likely do this by extending them loans under more flexible conditions than usual.
The central bank will also provide 2 trillion to 3 trillion yen in funds through its market operation Monday morning, two to three times the normal amounts, to soothe markets and keep short-term borrowing costs from spiking.
At the rate review later in the day, the central bank will pledge to continue flooding markets with more cash than usual, via its market operations, to calm investors and prevent market turmoil that could hurt the economy.
The move will be largely symbolic as Japan's banking system is already awash with cash under the BOJ' ultra-easy monetary policy. Analysts do not expect a run on banks or any disruption in fund settlements.
A pledge to offer ample liquidity alone will be of little surprise so is unlikely to cause much market reaction beyond keeping money market rates stable and low.
The quake deals a blow to Japan's economy just emerging from a lull, and may delay its return to a moderate recovery.
The area hit by the quake is home to plants of big manufacturers such as Toyota Motor Co. Many of them have halted operations, which may hurt corporate earnings.
If stock prices fall sharply in the aftermath of the quake or the yen rises because of expectations that Japanese companies and households will bring funds invested overseas back home, this may hurt consumer and business sentiment and also pose a threat to growth.
In such case, the central bank may remind markets, either in its post-meeting statement or via Governor Masaaki Shirakawa's comments to the media, that it is ready to further ease policy further by boosting its asset buying plan launched last year if the quake's impact or market turmoil warrant a policy response.
Bond yields and the yen may fall and stocks may gain if the BOJ' message is strong enough, although the impact is likely to be temporary.
The BOJ is wary of any market moves that could harm business confidence and so will carefully watch the yen and stock prices when Tokyo markets open on Monday.
It may talk of undesirable volatile market moves if fund repatriation pushes the yen close to its 15-year high hit last November.
However, it would probably take a yen spike well above its record high or a stock market plunge to spur the BOJ to immediately loosen monetary policy.
With the policy meeting cut short to one day, the board is likely to focus on assessing the near-term impact on the economy and on sending out a reassuring message to markets about supply of funds.
Even if the BOJ were to ease policy, it will likely opt to expand its asset buying fund rather than take other drastic measures such as boosting long-term government bond buying or reverting to outright quantitative easing.
The surprise effect would probably dent bond yields and the yen, although it would probably wear off soon unless the BOJ took more radical steps to support growth.
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