No Exit For Japan

Early word from the G8 meeting, like the EU fin min meeting, is that officials recognize that it is premature to enact exit strategies from the emergency facilities and actions to address the economic and financial crisis.

The BOJ is the next major central bank to meet. It will hold its meeting on July 14th-15th. Its current program, which includes purchasing commercial paper, corporate bonds unlimited loans to commercial banks, are set to expire at the end of the September. There is some speculation that the BOJ may want to be pro-active and indicate an extension of the programs rather than waiting for either next month or September. This would send, arguably, important signals to the market about the BOJ commitment and lift some degree of uncertainty. Now is not the time, so the argument goes, for strategic ambiguity.

The BOJ last extended its programs that were set to expire in March 2009 in Febuary, a month before. That would make August a more likely time frame than next week's meeting. However, what makes now different than then is politics. By the middle of next month the campaigns for the mid-September elections will be well under way. Yet, it is not clear the political implications of extending the emergency programs. Prime Minister Aso is Japan's third prime minister that has no popular mandate. His support in the recent polls is less than 20%. The issue of the election is unlikely to appear prominently in the BOJ deliberations.

On balance, then the BOJ most likely will have to extend the programs, probably until the end of the current fiscal year next March, but look for a decision in August, not next week.