Business

Q&A: Why Japan cash move matters

Houses are swept by water following a tsunami and earthquake in Natori City
Image caption The devastation caused by the earthquake and tsunami may lead to an emergency budget

The Bank of Japan (BOJ) will inject 15 trillion yen ($183bn; £114bn) into the country's banking system to stabilise markets.

Masamichi Adachi, a senior economist for Japan at JP Morgan in Tokyo, explains why this cash injection is so important and what the Bank of Japan hopes to achieve.

So why has there been a cash injection?

Because we are now in a big crisis. People tend to withdraw their cash at times like this, so the banking sector as a whole could then have a liquidity shortage.

That's why the BOJ needs to inject funds into the financial system.

How big is this cash injection?

It is huge. The BOJ has increased it for the third time [since the earthquake] and now I think more increases are possible as well as some kind of [monetary] easing policy.

So what policy changes are we likely to see?

The economy is in a crisis situation. People are afraid of what is going to happen in the future. At this time, policymakers need to stimulate the economy. Therefore, easing is required.

However, given that the BOJ already has a very accommodating policy [ie interest rates are very low already], I think what they are now discussing is how effective further easing can be.

The BOJ is always concerned about the side effects of aggressive easing, but this is an extraordinary situation.

What might those side effects be?

If the markets think the BOJ is [buying up government debt] then that means long term yields may go up. This could deteriorate the credibility of the currency. That is not the BOJ's intention, but the market may perceive it that way.

Japan is one of the biggest net creditors to overseas [markets]. Japanese investors tend to repatriate their capital from overseas to domestic markets in times of crisis [putting upward pressure on the yen]. The BOJ wants to stabilise that pressure.

If the situation becomes more stable, then there is less appreciation pressure on the yen. Then it could return to the level it was at before the crisis.

What effects do you see on the yen in the short term?

In the very short term, the yen should depreciate. But in the more medium term, in the next two or three months, the pressure for appreciation will remain.

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