Bank of Japan's options limited as it debates policy

Yen notes
Image caption Bank of Japan has been trying to maintain liquidity in the financial markets after the quake and tsunami

The Bank of Japan is meeting to discuss its next response to the devastation which threatens to derail an already fragile economy.

The bank announced a series of measures after the earthquake and tsunami, including injecting 37 trillion yen ($439bn; £270bn) into the financial markets.

The bank is under pressure to intervene further to cushion the quake's impact.

However, analysts say the Bank of Japan's options are limited.

Given the central bank's prompt reaction to the devastation, analysts say it is unlikely to announce any further policy changes after the meeting.

"It has already pushed almost 10% of the GDP as liquidity into the economy," said Martin Schulz of Fujitsu Research in Japan.

"It is unlikely that we will hear anything new," he added.

Analysts also said that given the extent of the damage, the central bank alone would not be able to rescue the economy.

"I don't think any single policy can help make the situation better in a short period of time," said Takahira Ogawa of Standard & Poor's.

"What the government might do is speed up its reconstruction efforts to ensure an improvement in macroeconomic conditions and a speedy recovery," he added.

Underwriting bonds

One of the measures that is being debated by economists is whether the Bank of Japan should underwrite government reconstruction bonds.

While some have pushed the idea, saying that is necessary to fund the massive cost of reconstruction, others have raised concerns about it.

"The moment the Bank of Japan starts to underwrite these bonds directly, it runs a huge risk of undermining trust in its monetary policy," said Mr Schulz.

Just days after the quake and tsunami struck, the central bank announced that it would double its asset-buying programme to 10 trillion yen.

Mr Schulz said the bank was likely to continue easing the programme further.

"It could continue pushing and providing liquidity by its easing policy and by some more asset-buying, but that will be more through the secondary market not directly underwriting government bonds," he said.

Cheaper credit

The disaster has caused widespread damage, not only to Japan's infrastructure, but also to that of some of its biggest companies.

Power cuts and a shortage of parts has led to many factories suspending production.

Some manufacturers are struggling to get their production lines up and running, affecting their revenue and profits.

As these companies try to get back on track, analysts say the central bank is likely to announce measures to help speed up recovery.

"What we might see is a new programme to help companies directly affected by the quake to get cheaper and faster credit to help them rebuild," said Mr Schulz.

He said similar measures were initiated by the central bank after the Kobe earthquake and during the global financial crisis.

However, he warned that the programme would be limited in scale.

"Compared to what the Bank of Japan has already done, this will be very very minor," he said.

Future outlook

Image caption Many Japanese factories were damaged, while production at others has been halted after the quake

While not much change is expected from the central bank's policy meeting on Wednesday, analysts will be keeping an eye on the Bank's outlook report that is due on 28 April.

The central bank is expected to cut its economic forecast in the wake of the damage caused to the economy.

An indication of that was provided earlier this week when the Bank of Japan's re-released Tankan survey showed that business sentiment in Japan had deteriorated sharply.

The business sentiment index for the three months to June stood at minus 2, compared with a reading of plus 6 for the first three months of the year.

A negative reading indicates that the number of respondents who think business conditions are deteriorating are more than those who think conditions are improving.

Until the full extent of the damage becomes clear and the recovery process is under way, analysts suggest that the central bank is likely to keep some policy moves in reserve, should conditions worsen.

"They will hold all their cards to their chest, as they know the crisis is not yet over," said Mr Schulz.