Currency

Japan Moves To Prevent Financial Panic

Japan market
Eugene Hoshiko/AP

Japan's central bank dumped a massive amount of money into the country's economy today in an effort to prevent a financial panic.

The bank's message, according to Marcus Noland, an economist at the Peterson Institute for International Economics:

We're going to backstop this thing. If you want to sell, fine. But the market will not fail.

The message, apparently, got through. Though Japan's Nikkei stock index fell sharply when the market opened, it remained stable through the rest of the day. And the basic financial systems that people and businesses use every day continued to function. Update: The Nikkei fell by more than 10 percent on Tuesday. Other Asian markets also fell. Here's more from Bloomberg.

Specifically, the Bank of Japan poured 15 trillion yen — about $183 billion — into the economy, largely by making very short term loans to banks and corporations. (In finance jargon, this is what it means to "inject liquidity" into the market.)

It was a massive move, and one that filled a classic role for a central bank: Buyer of last resort in times of panic. Noland told me that the bank's announcement alone may have gone a long way toward settling the financial system:

They simply announce, "We've got 15 trillion yen in our wallet, and we're going to spend it." ... Everybody calms down. The idea is, the market will begin to reflect the underlying reality of the Japanese economy post-earthquake, not some kind of pure panic, speculative seizure.

Besides pouring all that money into the short-term market, the bank also promised to buy an additional $61 billion in stocks, real estate, and government and corporate bonds between now and June of 2012. (The stocks are in the form of index ETFs; the real estate is through REITs.)

This doubled the size of an existing program that was set to wind down this year. Japan's central bank has bought a wide range of assets, since the '90s, in a long effort to prop up the economy.

Before the earthquake, "there were expectations built up in the market that the Bank of Japan would start moving out of that policy," Noland said. "What [today's announcement] did was say, 'Not for a while.'"

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