By Goh Eng Yeow
Markets Correspondent
engyeow1@sph.com.sg

 

In three days, the Bank of Japan (BOJ) has poured enough money into the financial system to make the printer trigger-happy US central bank blush.

Between Monday and Wednesday, BOJ injected a triggering 28 trillion yen ($466 billion) to stop Japanese banks and insurers from crushing under the impact of last Friday’s devastating earthquake and tsunami.

And as panic spreads over Tokyo over the possibility of radiation contamination from the earthquake-struck nuclear reactors in nearby Fukushima, the BOJ swung into further action this morning.

As I wrote this, I saw a flash on my TV screen that it is pouring another US$63 billion ($80 billion) into the financial system today.

So in only four days, the BOJ has spent the equivalent of two-thirds of the US$600 billion which the US Fed said in September 2010 that it would print, to try and jumpstart the frail US economy.

But unlike the sum spent by the BOJ in days, that sum earmarked by the Fed was supposed to be spent over several months.

The funds which BOJ is making available to Japanese banks is ostensibly to enable them to keep lending to customers. This will keep the troubled Japanese economy running.

It will also keep at bay the systemic risk that comes from banks and businesses refusing to do business with each other, for fear that some may collapse and drag them into bankruptcy too.

The massive intervention by the BOJ has another use: It has considerably slowed down the plunge of the Tokyo stock market.

It raises the question as to whether some of the money has leaked to support the tottering Japanese markets.

Despite the Simex Nikkei-225 futures flashing red and plunging by almost 6 per cent before Tokyo’s opening bell this morning, Nikkei is down by only 2 per cent currently.

The steadying of the Nikkei-225 has also taken some of the wobble off the STI and the Hang Seng.

Tuesday’s 11 per cent plunge in Nikkei-225 may have pushed some of the weaker Japanese banks close to busting their capital adequacy ratios. This is the minimum capital which each bank must hold before it can lend out any money.

The UK-based Daily Telegraph noted that Japan’s top three banks own US$1 trillion in Japanese stocks. Thus any precipitous drop in Nikkei will carry a systemic risk as well.

The rationale is simple: If a top Japanese bank doesn’t have enough capital on its books, it can’t lend any further. This will lead to a credit crunch which will hit the broader Japanese economy.

The next 48 hours will be crucial for Tokyo.

By Saturday, we should know if the fight to contain the radiation contamination risk from the stricken Fukushima nuclear plant is successful, or whether a wider evacuation will be in the pipeline.

Now that is one scary scenario which even the mighty BOJ will find unsettling.