BoJ upends markets with easing

Bond extensions and added ETF buys

The Bank of Japan surprised markets Friday by deciding to expand the scope of its asset purchase program in a move to enhance its already massive monetary easing to keep the nation’s fragile economic recovery on track.

The central bank will set up a new programme to increase its purchase of exchange-traded funds (ETFs) by around 300 billion yen ($2.5 billion) annually, in addition to the current scheme to buy at an annual pace of about 3 trillion yen.

The Bank of Japan will also extend the average maturity of its government bond holdings to seven to 12 years from next year, up from seven to 10 years, in a bid to lower long-term interest rates and help companies raise funds.

The changes “are not intended to respond to downside risks to the economy and prices,” said central bank governor Haruhiko Kuroda, underscoring they are not considered additional easing while expressing confidence that the underlying inflation trend is improving amid an economic recovery.

The new steps “will help implement asset purchases smoothly, enabling the central bank to make adjustments swiftly if needed” to achieve the bank’s 2% inflation target at an early date, Mr Kuroda told a press conference.

The Bank of Japan maintained its programme to increase the monetary base by 80 trillion yen a year through asset purchases.

Three of the nine Policy Board members opposed the new ETF programme, which the bank called “supplementary measures” for its current policy.

Under the new scheme to be launched in April, the central bank will purchase ETFs composed of stocks issued by firms “proactively making investment in physical and human capital,” it said.

The move comes as the government of Prime Minister Shinzo Abe has been asking companies to raise wages and boost investment using the record profits that followed a set of stimulus measures by the government and the central bank.

Following the announcement, the Nikkei stock index jumped by 500 points at one point, but soon lost steam and headed sharply lower, showing the market’s mixed reaction to the measures.

Some analysts said the Bank of Japan is trying to keep alive its message that the economy is recovering.

Without significantly changing its policy framework, the central bank employed a sort of “shortcut method” to encourage companies to increase spending, said Hiroshi Watanabe, senior economist at SMBC Nikko Securities Inc. “It is a mind game by the Bank of Japan to anchor people’s expectations.”

The central bank took the measures as it has been struggling to achieve its 2% inflation goal largely due to falling energy prices.

The bank says it expects to achieve the goal around the second half of fiscal 2016, but recent data have shown that inflation expectations among companies and households have weakened.

Still, the Bank of Japan maintained its overall assessment of the Japanese economy, saying in a statement following the meeting that the economy “has continued to recover moderately, although exports and production have been affected by the slowdown in emerging economies” such as China.

The Bank of Japan’s decision on Friday also highlighted the contrast between Japanese and US economic conditions, as the Federal Reserve on Wednesday slightly tightened its policy by raising interest rates for the first time in nearly a decade, a move that signals a stable recovery there.

The dollar strengthened against the yen immediately after the Bank of Japan’s announcement, briefly topping 123 yen before losing ground.

Japan’s economy avoided a recession in the third quarter with an annualised real 1.0% gain in GDP.

But many economists expect growth for the current quarter to be modest amid concerns about a slowdown in China, one of the biggest destinations for Japanese exports, and a tepid increase in consumer spending.