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Bank of Japan chief shows how radical he plans to be

Newly appointed Bank of Japan governor Haruhiko Kuroda.


The new governor of the Bank of Japan vowed to run a more aggressive monetary policy than his cautious predecessors to attack the country's chronic deflation and deepening economic slump.

Thursday, at the first policy meeting on his watch, Haruhiko Kuroda showed just how radical he intends to be.

The central bank unveiled plans for a massive injection of quantitative easing that will double Japan's monetary base – at an annual clip of about ¥60-trillion to ¥70-trillion - quadruple its purchases of Japanese government bonds and expand the types of other assets it will acquire.

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Bank watchers were expecting that Mr. Kuroda would make some waves, but they didn't count on such aggressive action.

The dramatic ballooning of the bank's balance sheet - which includes buying ¥7.5-trillion worth of long-term Japanese bonds a month – will continue as long as necessary to reach the bank's target of 2 per cent annual inflation, it said in a statement.

The news triggered an immediate stock market rally in Tokyo and knocked about 2.5 per cent off the value of the yen against the U.S. dollar.

The policy changes will "lead Japan's economy to overcome deflation that has lasted nearly 15 years," the Bank of Japan said in a statement.

"Whether this is the solution to Japan's woes will depend upon the success of policies outside of the monetary sphere," Guy Foster, head of portfolio strategy with Brewin Dolphin in London, said in a note to clients. "Particularly, companies need to feel confident enough to raise nominal wages even as import costs are rising."

Prime Minister Shinzo Abe had promised such an assault on deflation as part of his successful political campaign in December and had scolded the central bank for being timid in Japan's two-decade-long economic funk.

"Abenomics" calls for a huge hike in public spending, as well as the central bank action launched Thursday, in a bid to boost real growth to a slim 1 per cent , 3 per cent nominal. That would be a dramatic turnaround for an economy that has contracted, on average, by a nominal 0.7 per cent for the past 15 years.

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If the ramped up quantitative easing doesn't do the job, the bank still has one massive weapon. It could actually crank up the printing presses.

"Everyone has feared that quantitative easing means printing money," said Phillip Colmar, a strategist with Montreal-based MRB Partners. "The reality is that central bankers haven't done that."

Instead, they have boosted banking system reserves "and tried to leak it through into the real economy, rather than print money. Japan could be the first central bank to do that. But it's way too early to make that call."

Debasing the currency in such a manner would certainly be one recipe for tackling deflation. But it would also likely be the trigger for a new round of dangerous currency wars.

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More


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