Via Financial Times

The prospect of a rolling monetary stimulus around the world spurred a rebound in financial markets on Monday after the Bank of Japan followed the US Federal Reserve with a vow to fight the coronavirus.

In an emergency statement as markets opened on Monday morning, BoJ governor Haruhiko Kuroda promised to inject liquidity into markets and hinted at raising asset purchases, indicating the central bank is moving into crisis mode.

The second pledge within days from a G7 central bank raised the prospect of co-ordinated global action to offset the spiralling economic hit from Covid-19.

“The Bank of Japan will closely monitor future developments, and will strive to provide ample liquidity and ensure stability in financial markets through appropriate market operations and asset purchases,” Mr Kuroda said.

The BoJ followed up with ¥500bn ($4.62bn) in short-term liquidity to banks. Liquidity operations, which provide banks with short-term loans to handle any increased demand for cash, are distinct from asset purchases aimed at driving down long-term interest rates or supporting stock prices.

“Expectations for the amount of easing from central banks around the world have just gone through the roof,” said Kerry Craig, global market strategist at JPMorgan Asset Management, pointing to rising hopes that the US central bank will cut rates at its March meeting.

The S&P 500 last week dropped 11 per cent, marking the Wall Street benchmark’s worst week since the global financial crisis. Investors fear the coronavirus will hit global economic growth. 

On Monday, equities initially sold off across Asia after China’s official manufacturing purchasing managers’ index at the weekend showed factory activity plunged to an all-time low in February. But stocks switched direction following the BoJ statement.

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The Topix share index reversed its losses to add 1 per cent after Mr Kuroda’s statement, while China’s CSI 300 of Shanghai- and Shenzhen-listed stocks gained as much as 3.9 per cent, on pace for its best one-day gain since May.

S&P 500 futures added 0.9 per cent, while contracts for London’s FTSE 100 stock benchmark were up 2.4 per cent.

Brent crude, the international marker for oil, was 3.2 per cent higher at $51.28 a barrel.

In early trading on Monday, the yield on 10-year US Treasuries fell as much as 11 basis points to 1.0347 per cent, a new record low, before pulling back to be down 4 basis points. Yields fall as bond prices rise.

Mr Kuroda’s statement follows similar remarks over the weekend by Fed chairman Jay Powell, who promised to “act as appropriate to support the economy”. However, neither central bank has yet pledged any substantive monetary easing.

Japan’s government also pledged further action, promising wage subsidies for parents forced to take time off work because of school closures. That would help to offset any fall in demand caused by lost wages. 

Governments around the world have signalled fiscal support to counter the outbreak, with Italy’s government saying it will inject €3.6bn into its economy to mitigate the disease’s impact.

Masamichi Adachi, chief economist at UBS in Tokyo, cautioned that the BoJ’s statement did not herald immediate monetary policy action. With overnight interest rates already at minus 0.1 per cent and a cap on 10-year bond yields at zero, the BoJ has limited options and is reluctant to ease further compared to some other central banks.

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“It’s difficult to argue that any monetary policy easing can answer this kind of shock from a virus,” said Mr Adachi. “I think the BoJ and the European Central Bank have very limited tools from here compared with the Fed.”

With the Fed’s target range for short-term interest rates at 1.5 to 1.75 per cent, it has more room to cut. Goldman Sachs projects the Fed will cut by 0.5 percentage points in March and another 0.5 percentage points in the second quarter. 

Goldman analysts wrote on Sunday that they were “forecasting rate cuts by most other G10 [and some emerging markets] central banks, including a cumulative 100 basis points of cuts in Canada, 50bp in the UK, Australia, New Zealand, Norway, India and South Korea, and 10bp in the Euro area and Switzerland”.

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