The Bank of Japan (BOJ) has pledged to ramp up its asset-buying program as part of an aggressive stimulus package, in the latest effort by a major central bank to loosen monetary policy and spur economic growth.
Newly appointed Governor Haruhiko Kuroda committed the BOJ to buying about ¥84 trillion of Japanese government bonds this year – the equivalent of 17 percent of GDP – dwarfing its previous target of ¥46 trillion yen.
The central bank will also extend the average maturity of government debt to seven years from three years and increase its purchases of exchange-traded funds and real estate investment trusts.
The dollar and euro rose more than 3 percent against the yen following the announcement, while the yield on the 10-year Japanese government bond fell to a record low 0.425 percent.
“This is an unprecedented degree of monetary easing,” Kuroda told a news conference after the BOJ policy meeting, according to Reuters.
“We took all available steps we can think of. I’m confident that all necessary measures to achieve 2 percent inflation in two years were taken today,” he said.
The size of the stimulus package surprised market observers and showed that Kuroda, who replaced Masaaki Shirakawa in March, was determined to make good on his promise to achieve the inflation target announced in January.
“The timing was a surprise and the magnitude was more than expected,” Credit Suisse analysts Hiromichi Shirakawa and Takashi Shiono said in a report entitled “New BOJ, But Old-Fashioned QE.”
“The key question to be asked is whether this aggressive government debt monetization will really be able to push up inflation rates,” the two analysts said.
The BOJ’s shock therapy is designed to jumpstart the world’s third-largest economy, which has been hit hard by collapsing exports to China and the European Union, falling domestic auto sales and decelerating post-tsunami reconstruction spending.
Prime Minister Shinzo Abe, who returned to power in December, has made reversing more than a decade of deflation one of his top priorities.
A steady stream of negative economic data in the past few months has supported his case for more aggressive monetary and fiscal policies.
Though the Japanese economy stopped contracting in the fourth quarter, growth was a meager 0.2 percent year on year, and recent data suggest conditions probably worsened in the first quarter of 2013.
Credit Suisse said the BOJ was applying “close to the maximum possible” dose of stimulus to the stagnating economy, but even that may not be enough to defeat deflation.
“We stick to our view that achieving 2 percent inflation by merely increasing the monetary base is not particularly feasible” without changes to the economic structure, Credit Suisse said.
The Bank of Japan is not alone in its efforts to stimulate growth. The U.S. Federal Reserve and Bank of England also have been using “non-conventional” monetary policies to spur economic activity.
The measures have depressed the value of their currencies and drawn sharp criticism from emerging market economies, which claim the leading industrialized nations are manipulating their currencies to gain a trade advantage.
Photo by Kyodo via AP Images