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Japan’s central bank enters bold ‘new dimension’ of monetary policy

Haruhiko Kuroda, governor of the Bank of Japan, has set an aggressive inflation target of 2 per cent, in two years.

Haruyoshi Yamaguchi/Bloomberg

Even Haruhiko Kuroda doesn't know whether his bold experiment in monetary easing will work.

But the Bank of Japan's new governor is putting it to the test in an aggressive move to revive the country's foundering economy and put an end to nearly 15 years of debilitating deflation.

Mr. Kuroda ushered in a new era for the central bank Thursday, unveiling a plan for unprecedented purchases of bonds and other assets that would double Japan's monetary base, at an annual rate of some ¥60-trillion to ¥70-trillion ($631-billion to $736-billion).

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The bank will quadruple its purchases of Japanese government bonds over the next two years.

The swelling of the central bank's already large balance sheet is designed to achieve a new inflation target of 2 per cent.

Under Mr. Kuroda's cautious predecessor, Masaaki Shirakawa, the central bank could not even reach its previous goal of 1 per cent.

"This is an entirely new dimension of monetary easing, both in terms of quantity and quality," Mr. Kuroda told reporters in Tokyo after presiding over his first policy meeting since taking the helm two weeks ago.

Analysts warn that unless the new government of Prime Minister Shinzo Abe follows through with the other two planks of his "Abenomics" strategy – a major increase in spending and promised structural reforms, including deregulation to boost competition and encourage business investment – monetary policy alone can't set the world's third-largest economy back on the rails.

And even the structural reforms will not be able to address Japan's critical problem of a shrinking population and work force.

"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. "Particularly, companies need to feel confident enough to raise nominal wages even as import costs are rising."

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Still, Prime Minister Abe was delighted with the Kuroda plan. "I had chosen the governor and the deputies, believing that they have the ability, the will, and can embark on bold monetary policy," Mr. Abe said in a television interview. "They did a brilliant job in meeting everyone's expectations."

Japanese equities surged on the news, reversing an earlier decline and posting their biggest gain in two months. The yen slid against every other major currency and 10-year Japanese bond yields fell to a record low.

Even bank watchers who acknowledge that the experiment is worth trying question whether Mr. Kuroda can achieve his inflation target of 2 per cent in a scant two years, given that deflation has had much of the past two decades to burrow deep into the psyches of Japanese businesses, consumers and investors, altering their behaviour toward spending and saving in ways that will be difficult to change.

"There's just no real way of knowing how long this is going to take, how successful they're going to be, what amount it will really take for them to be successful," said Benjamin Reitzes, senior economist at BMO Nesbitt Burns Inc. in Toronto. "Putting a time constraint on things might prove ambitious. Beyond that, they don't really know what the impact of this is going to be."

The central bank will be able to drive the currency lower, said Phillip Colmar, a strategist with Montreal-based MRB Partners. "The question is how much. You have to depreciate the yen quite substantially" to fuel some inflation and change consumer habits, he said.

The Bank of Japan already had the largest balance sheet, in relation to the size of the domestic economy, among the major central banks. Based on the latest monthly numbers, the bank's balance sheet stood at 35 per cent of gross domestic product – a percentage that will at least double with the planned expansion of asset purchases. By comparison, the European Central Bank total is 28 per cent; the Bank of England 26 per cent; and the Federal Reserve 20 per cent, Mr. Reitzes noted.

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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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