US $ 1.4 tril stimulus for Japan economy
BOJ board fully supports the unprecedented stimulus
TOKYO: The Bank of Japan (BoJ) has unleashed the world’s most intense burst of monetary stimulus, promising to inject about US$1.4 trillion into the economy in less than two years, a radical gamble that sent the yen reeling and bond yields to record lows.
New governor Haruhiko Kuroda committed the BoJ to open-ended asset buying and said the monetary base would nearly double to 270 trillion yen (US$2.9 trillion) by the end of 2014 in a shock therapy to end two decades of stagnation.
The US Federal Reserve may buy more debt under its quantitative easing, but with Japan’s economy about one-third the size of the United States, the scope of Kuroda’s “quantitative and qualitative monetary easing” is unmatched.
“This is an unprecedented degree of monetary easing,” a smiling Kuroda told a news conference after his first policy meeting at the helm of the central bank. “We took all available steps we can think of. I’m confident that all necessary measures to achieve 2% inflation in two years were taken today (yesterday).”
One of those steps was to abandon interest rates as a target and become the only major central bank to primarily target the monetary base – the amount of cash it pumps out to the economy. It adopted a similar policy in 2001–06, but not on this scale.
The scope of the changes Kuroda pushed through, and the fact he secured unanimous board support for them, drove the yen down sharply, knocked the 10-year bond yield to a record low, and nudged Tokyo share prices just shy of a 4½-year closing high.
“The result is nothing short of regime change,” HSBC’s Japan economist Izumi Devalier said in a report. “The BoJ has now made a much firmer commitment to achieving its 2% inflation goal, and has demonstrated that it will do anything short of foreign-bond buying to achieve this goal.”
The scope of Kuroda’s overhaul offered immediate comfort to Japanese markets, but contains major risks.
It could leave the central bank heavily exposed to government debt and potentially huge losses if it failed to stoke inflation and investors lost faith in its efforts to revive the economy, and it could trigger a currency war as other Asian exporters seek to remain competitive with a weaker yen.
“It is as if we’ve gone back to the quantitative easing of the 2000s,” said Hiroaki Muto, senior economist at Sumitomo Mitsui Asset Management in Tokyo. “Targeting the monetary base will lead to a huge increase in current account balances that commercial banks keep at the BoJ, but I’m still not sure if this money will move through the economy.”
Monetary base, or cash and reserves at the BoJ, already hit a record in March, but the huge pile of money has failed to end deflation or boost wages.