The Bank of Japan has delivered a two-pronged attack on weak economic growth and a stubbornly high yen in response to political pressure.
The bank committed to buying another ¥10-trillion ($128-billion U.S.) of government bonds through its existing ¥55-trillion asset-buying program. In the second, it said it would set a consumer price inflation target of 1 per cent year on year “for the time being” in an effort to show “its determination to overcome deflation”.
The yen fell 0.5 per cent to ¥77.96 on the news. The BoJ acted 24 hours after Japan revealed its economy had shrunk an annualized 2.3 per cent in the final quarter of 2011.
Tuesday’s measures come after opposition politicians had urged additional stimulus, claiming that moves by other central banks showed the BoJ was not doing enough to ease policy and to counter deflation.
Last month the US Federal Reserve adopted a 2-per-cent inflation target and signalled another round of asset purchases, while the European Central Bank has aggressively expanded its balance sheet.
Analysts suggested the first measure was the more significant, as it should ease fears over fiscal sustainability amid falling tax receipts. To meet its target of another ¥10-trillion of purchases this calendar year, the BoJ will have to increase its monthly bond purchases by ¥1.4-trillion a month, on top of the ¥1.8-trillion it buys each month now.
“This implies that the BoJ will make a much greater contribution to the demand-supply balance of the JGB market,” wrote Christian Carrillo, head of Asia-Pacific interest rate strategy at Société Générale in Tokyo, in a note to clients.
As for the second measure, some said it was a clear response to a recent call from economy minister Motohisa Furukawa that the BoJ should improve communication of its stance on prices. Remarks from finance minister Jun Azumi after the BoJ’s statement suggested the government welcomed the announcement.
But some analysts were unconvinced. “This is more a linguistic change than a policy change,” said Kyohei Morita, economist at Barclays Capital. “Politically, this meant something, but economically it meant nothing.”
Japan has experienced more than two decades of falling prices, with the only respite brought on by higher oil prices in the mid-2000s. Under governor Masaaki Shirakawa, the BoJ has been reluctant to set firm targets for inflation on the understanding that once such a target was set, policy makers would feel bound by it, resulting in the loss of policy flexibility.
Privately, the BoJ has long maintained that countries create inflation two ways: by narrowing the output gap, and by destroying confidence in the currency. The first is not its job, it says, while the second is irresponsible.
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