Bank of Japan makes boldest attempt yet to lift economy

BoJ also adopted an open-ended commitment to buy assets
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First Published: Tue, Jan 22 2013. 08 55 AM IST
Bank of Japan (BoJ) governor Masaaki Shirakawa (centre) and board members attend a policy meeting in Tokyo on Tuesday. Photo: AFP
Bank of Japan (BoJ) governor Masaaki Shirakawa (centre) and board members attend a policy meeting in Tokyo on Tuesday. Photo: AFP
Updated: Tue, Jan 22 2013. 07 31 PM IST
Tokyo: The Bank of Japan (BoJ) announced on Tuesday its most determined effort yet to end years of economic stagnation, saying it would switch to an open-ended commitment to buying assets next year and double its inflation target to 2%.
It promised to reach the inflation goal “at the earliest possible time.”
The steps represent the latest unorthodox effort by a leading central bank to support a weak recovery from the global financial crisis, although in Japan’s case the country is also trying to overcome nearly two decades of low-grade deflation.
The BoJ’s break from an earlier policy of topping up a lending and asset buying programme launched in October 2010 follows weeks of relentless pressure from new Prime Minister Shinzo Abe for a greater push to lift an economy out of recession.
In a joint statement with the government, it affirmed a well-flagged move to commit to the inflation target. Consumer price inflation has reached 2% in only a handful of months since the late 1990s.
But aware that markets had already factored in the new price goal and more asset buying and that merely meeting those expectations could trigger a negative reaction, central bankers took steps that several analysts thought would only come later.
“This is very good news. For once, the BoJ has been more aggressive than the market expected,” said Brian Redican, senior economist at Macquarie in Sydney. “The government is clearly forcing the pace of change, which is no bad thing.”
The central bank said that from 2014 it would switch to an open-ended approach of buying a certain amount of assets—¥13 trillion ($144.77 billion)—each month without setting a deadline for completing the purchases.
By doing so, the BoJ, often criticised for its step-by-step easing, would be emulating the US Federal Reserve, though analysts were quick to point out that unlike the Fed, the BoJ delayed until next year the launch of the open-ended buying scheme.
The yen, which inched up ahead of the policy announcements, fell immediately after the decision, though later crept up higher.
Several analysts also said the BoJ could still do more and there will be expectations that it will follow through with further steps mooted by politicians, economists and some central bank policymakers.
More Action Expected
One such step would be to scrap the 0.1% floor for short-term interest rates, while another would be for the central bank to buy longer-duration bonds.
“There’s still a lot of work to do, and still a lot of room for improvement,” said Tadashi Matsukawa, head of fixed income at Pinebridge Investments in Tokyo.
Abe, who led his Liberal Democratic Party to a landslide victory in a 16 December parliamentary election and made aggressive budget and monetary stimulus a centrepiece of his campaign, hailed Tuesday’s action as a game-changing breakthrough.
“It is ‘epoch-making’ in a sense of bold review of monetary policy,” he told reporters. “It has become clear that there will be a ‘regime change’ in macro economic policy.”
Abe’s pledges to boost public spending and repeated calls for more BoJ action helped reverse a long-term rise in the yen and set off a stock market rally led by exporters and construction firms.
But many economists have warned the stimulus could give the sluggish economy only a temporary jolt if the government fails to follow through with politically more difficult economic reforms such as deregulating its protected farming sector.
They also warn that the push to reflate the economy could backfire if Abe’s government fails to convince markets that it has a credible plan to get Japan’s ballooning debt back under control.
Seeking to address such concerns, the government said in the joint statement it would draw up a growth strategy and pursue structural reforms to help Japan escape deflation and pledged to maintain fiscal discipline. Economics minister Akira Amari attended the BoJ meeting to represent the government’s views.
The yen has lost 13% against the dollar in the past two months to hit a two-and-a-half-year low on expectations of bolder central bank action. Tokyo stocks have gained a fifth on the view the weaker yen will boost the export earnings of the likes of Nissan Motor Co and Canon Inc.
The yen’s declines, however, have drawn complaints from countries like Russia and Germany, worried that it could set off destabilising currency devaluations.
In a sobering reminder that Japan still faced an uphill battle in pulling out of more than a decade of low-grade deflation, the BoJ’s updated economic forecasts showed core consumer prices inching down in the current fiscal year and up only 0.9% in the fiscal year ending in March 2015.
“Headline says core inflation at only 0.9% in 2014 so when will they meet their inflation target of 2%?” asked Joseph Capurso, currency strategist at Commonwealth Bank Of Australia in Sydney. Reuters
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First Published: Tue, Jan 22 2013. 08 55 AM IST
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