Economy-Finance

RPT-WRAPUP 4-BOJ emergency funds gesture gets govt to back off

(For more stories on the Japanese economy, click [ID:nECONJP)

* Rates on hold; BOJ to offer three months fund at 0.1 pct

* Could cut yen 3-month LIBOR, check currency’s rally

* Shirakawa says move akin to quantitative easing

* Yen up, JGB futures trim gains on investor disappointment

By Tetsushi Kajimoto and Hideyuki Sano

TOKYO, Dec 1 (Reuters) – The Bank of Japan offered banksmore short-term funds after an emergency meeting on Tuesday,relieving government pressure on the central bank to help avertanother recession before upper house polls next year.

Markets primed for a return to full quantitative easingreacted with disappointment to the decision to offer 10trillion yen in three month funds at 0.1 percent. Analysts saidthe funds would do little to tackle deflation, although bylowering yen lending rates they may check the currency’s rally.

The prime minister and other ministers welcomed the move,suggesting the main outcome of the meeting was to publicly mendfences with the government, which was pressing the BOJ for apolicy response to deflation and the risk of a new recession.

“If the BOJ were free from pressure, they wouldn’t havedone anything, because they’ve been saying their assessmenthasn’t changed,” said Dariusz Kowalczyk, chief investmentstrategist at SJS Markets in Hong Kong.

By yielding to political pressure, the BOJ had left thedoor open to yet more demands as Japan grapples with thefallout of last year’s recession, the worst on record, analystssaid.

“This isn’t the end of the story,” said Richard Jerram,chief Japan economist at Macquarie Securities in Tokyo.

“There are going to be more periods of government pressureand more periods of BOJ response.”

Governor Masaaki Shirakawa, who holds talks with PrimeMinister Yukio Hatoyama on Wednesday, said the decision hadnothing to do with government pressure and cast it as anattempt to contain the fallout of Dubai’s debt woes.

“We can say this is quantitative easing in the broad sensethat we are trying to ensure banks are not faced with(liquidity) constraints,” he said after the meeting, at whichthe BOJ left interest rates unchanged at 0.1 percent.

Few economists saw the move as a return to quantitativeeasing — a policy of flooding banks with cash to stimulatelending — which the BOJ pioneered as it tried to pull Japanout of deflation earlier this decade.  Continued…